One of the few positive indicators the Fed can point to, the labor market, might not actually be that strong, a Memphis-based economist told the Wisconsin Bankers Association.
Though the national unemployment rate is now at 4.9 percent, Vining Sparks IBG chief economist Craig Dismuke pointed to other indicators. The labor participation rate, for example, hasn’t recovered. The percentage of people with full-time jobs isn’t yet at pre-recession levels. Payrolls are growing, but they’re largely coming from lower-wage sectors.
Changing all of that would help the sluggishly low inflation rates get closer to the Fed’s target, but there’s little indication that will occur, Dismuke said at a Madison Monona Terrace event this week.
“If that doesn’t happen, I don’t think they can raise rates,” he said.
The Fed last year raised interest rates for the first time since the recession hit, and it’s planning four potential increases this year. But Fed Chair Janet Yellen signaled this week the labor market could weaken if the global economy continues to slow down, which some expect might alter the Fed’s plans.
One of those points of concern has been China’s slowing economy, which has hit U.S. stock prices hard. But Dismuke said people should worry more about how the U.S.’s top trade partners are faring, from the Eurozone to Canada’s oil-dependent economy.
“Even if the Chinese economy is weaker [and] there’s volatility there, it will affect our exports, but it’s not the end of the world,” Dismuke said. “What matters more to us is what happens in the Eurozone, in Mexico and in Canada.”
The U.S., though, continues to perform well compared to other large economies. Just look at the people taking capital outside their country to buy U.S. treasuries, Dismuke said.
But growth here will also be sluggish, Dismuke said. He predicts the country’s GDP will rise 2.2 percent, slightly less optimistic than the 2.4 percent that the median economist surveyed by Bloomberg.
Businesses, he said, will slow down their capital investments, particularly those companies hurt by the oil decline. Manufacturers will continue to be hit hard by a stronger dollar that makes exporting more difficult, deepening the country’s trade deficit, he added.
The housing market also won’t play a huge role in boosting the economy, as people are increasingly buying houses to rent them to others, rather than live in those houses themselves. What that means is people will spend less on improving those properties, as they’ll only be there temporarily.
“I have never once washed a car that I’ve rented,” he said.
Two positives for the economy will be the consumer and increased spending from all levels of government. But even consumers won’t be as big a boost to the economy as they were last year, he said, as they’ll likely see lower savings from gas prices and are also spending less on retail.
“It looks like we’re starting to slow down, and instead, we’re starting to see the savings rate go back up,” he said. “That, to me, is a concern.”
— By Polo Rocha,