Markets were quiet last week as they awaited Federal Reserve Chair Janet Yellen’s comments at Jackson Hole, Wyoming. In short, she stated that “the case for an increase in the federal funds rate has strengthened in recent months,” thanks to “continued solid performance of the labor market and our outlook for economic activity and inflation.”
While the likelihood of a rate hike increased following her speech, what Yellen says compared to the realities of the strength of the U.S. economy are not always the same. Despite her confidence, economic growth has remained sluggish, national debt continues to soar, and worker productivity continues to fall as labor costs increase. See why these indicators, and more, could point toward a dimmer economic outlook than Yellen may have let on during her Jackson Hole speech, plus why gold could be the only reliable means of safeguarding your wealth amidst today’s perplexing economic times.
Weaker-than-expected economic growth
The U.S. hasn’t seen full-year GDP gains of more than 3 percent since the Great Recession, reports CNBC, and the economy has struggled to regain its momentum since output began slowing during the latter half of 2015. Along with downward revisions to corporate profits, export growth, business expenditures on equipment, and residential construction, the Commerce Department trimmed U.S. second quarter growth to 1.1 percent (down from 1.2 percent reported in July) in late August, notes Reuters Lucia Mutikani. Weaker-than-expected data, as downward revisions indicate, casts doubt on whether the Fed will raise interest rates by the end of the year, and on Yellen’s comment concerning “solid” economic activity.
Stagnant worker productivity coupled with rising labor costs
The longest decline in worker productivity since the late 1970s continues to challenge the U.S. economy, a “trend [that] shows little sign of reversing,” reports the Wall Street Journal. This lack of labor productivity, measured as output per hour worked, goes hand-in-hand with slow economic growth.
As the Wall Street Journal further notes, productivity in the second quarter decreased 0.4 percent over the previous year, the fastest pace of decline in three years. This dip followed a weak average annual productivity growth of 1.3 percent from 2007 through 2015, which was half the recorded growth rate between 2000 and 2007.
Given that productivity is one of the most important factors in determining future growth in wages, prices, and the country’s economic output as a whole, gains in this sector are an essential sign of a robust economy. Perpetually weak productivity could hurt American living standards, further limiting the economy’s ability to generate higher incomes and grow at a quick pace without prompting too much inflation.
As productivity continues to dip, labor costs continue to rise. Hourly compensation increased at a 3.7 percent rate in the second quarter instead of the previously reported 1.5 percent pace, reports CNBC via Reuters. While higher wages should benefit workers and thereby bolster spending, higher wages without matching productivity gains tend to hurt corporate profits, fan inflationary pressures, pressure business spending, and in general–further stifle the economy.
The potential for a stock market crash or fiscal crisis
According to observations by Fortune’s Chris Matthews, the U.S is experiencing the longest earnings recession since 2008. His sentiments are supported by Jim Bianco, president of Bianco Research, who points to data indicating that companies have been consistently cutting their estimates for future earnings as the close of the quarter approaches. Despite these estimates, stock market indexes are thriving, a rare coincidence that greatly resembles the crash of 1987 wherein the American stock market suffered one of its largest three-day declines in history. In the end, the S&P lost nearly 30 percent of its value between October 14 and 19.
Bianco explained in a letter to his clients that “since 1947, every time profits fell this much, or for this long, a recession was either underway or about to begin.” Leading up to the 1987 crash, corporate profits fell while “stock prices marched to new all-time highs. The same is happening now.”
Slashes in earnings estimates aren’t the only potential indicators of a looming crisis. The Congressional Budget Office (CBO) projects this year’s deficit at a whopping $590 billion, a 35 percent year-over-year increase reports Fox News. What’s more, the CBO’s projections indicate that the national debt will rise to $20 trillion in 2017. Along with “serious negative consequences,” the likelihood of a fiscal crisis in the United States would [also] increase,” writes the CBO. With the total national debt currently standing at $19.4 billion, it remains to be seen how the nation’s next president will address the government’s growing deficit.
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“Houston, we have a problem.”
At least according to Anthony Mirhaydari, a former markets columnist for MSN Money and senior research analyst with Markman Capital Insight. Why? Amidst her comments concerning the nation’s “solid” economic performance, Yellen also postulated as to whether the Fed might consider purchasing a wider range of assets in the future (similar to what the Bank of Japan is doing with equities or the European Central Bank is doing with corporate bonds). This comment further challenges her overall stance that the economy is improving, as it indicates that the Fed could be looking for new ways to inject money into the financial system–even ways that would require major legislative changes. If that’s the case, writes Mirhaydari, then “Houston, we have a problem.”
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