Time does not cause recessions, but time does allow imbalances to accumulate that will eventually drag us back into recession. We are entering the 76th month of expansion, counting from July 2009. The last four expansions, including the current one, have been longer than the historical average. Economists call this phenomenon “the great moderation.” The expansion of the 1980s lasted 92 months, the 1990s lasted 120 months, and the 2000s lasted 73 months, counting from trough to peak. Economic drags can be organized spatially into global, national and regional sources. The cooling of the Chinese economy has global implications, reaching from the Pacific Rim into Europe and South America. Potential national drags include the side-effects of the Fed’s extraordinary monetary policy. Zero interest rate policy has caused investors to reach for yield. It has also put pressure on pension funds and other parts of the financial system. It has reduced returns for retirees dependent on their investments in bonds. The weaning of the U.S. economy off of extraordinary policy has contributed to stock market volatility. Regional drags within the United States are evident in oil producing regions. The Houston economy is feeling the weight of the significant consolidation in the oil and gas industry. See page 2 for more discussion on regional economic activity.
Much ink has been spilled about the weaker-than-expected payroll employment data for September. A moderate 142,000 jobs were added for the month, and August gains were revised down to 136,000 jobs. When analyzing this data it is important to note that the 260,000 job per month average of 2014 was itself well beyond expectations and was simply unsustainable. The August and September data are still within the recent normal range and are not out of character compared to previous expansions. Our forecast shows a step-down in hiring as the current expansion ages. The soft hiring over late summer came as the job opening rate hit an all-time high. The jobs are out there, and that is a sign of a healthy economy. Even more important than job creation, for the overall economy, is wealth accumulation. The flow of funds data from the Federal Reserve shows that the net worth of U.S. households accelerated strongly through 2013 and 2014. Year-over-year wealth accumulation in the first half of 2015 eased to about 3.2 percent, simply because previous gains were strong.
We expect that the weaker-than-expected job creation through August and September will cause the Federal Reserve to maintain near-zero interest rate policy until the mid-December FOMC meeting. The Yellen Fed appears willing to err on the side of caution in maintaining extraordinary monetary policy for an extraordinarily long time. But there is no free lunch. The benefits of extraordinary policy are diminishing. The costs are increasing.
For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate_10_2015.