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Some Bears Never Give Up

There’s an old joke which says if you ask 4 economists the same question, you’ll get 5 different answers.  Perhaps the corollary to that is there are some economists who always give the same answer no matter what the facts may be.  Such is the case with today’s bears.

There have long been predictions of a second recession, or a double dip, and those who want to believe in such a future finally got their data point.  First quarter real GDP was revised downward to a -2.9% annualized growth rate.  The bears pounced as if a bucket load of salmon had been dropped in their midst.  The only problem was the stock market didn’t share the dour view. It has risen substantially since that data point was announced.  So why do the bears see a bleak future when the markets paint a rosier picture?

There are two types of bears out there these days. The first type believes that a fundamental problem with the US financial system was exposed back in 2008. They think the system is broken at its core. They also believe the only reason the economy has grown in the past five years is that various QEs, TARP, and other stimulus programs have created and fed a “sugar high”.  Thus, when the Fed started talking about tapering, they expected and got their long-awaited decline in the form of a drop in first quarter GDP.

The second type of bear is a political animal – and a particularly partisan one at that.  As long as President Obama is in office, these bears will see a major recession around every corner. For them, the drop in first quarter GDP is Obama finally getting what he deserves.  These bears can spend hours on cable or radio shows talking about economic disaster without consulting a single economist – let alone two to represent each side in a debate.

But let’s put the prejudices aside and look at the reality on the ground.    The context in which the drop occurred is a particularly brutal winter, and it clearly had an impact. So if the economy is inalterably defined for the year by the tone set in the first quarter, then, O.K., we’re going to have a bad year.  But, if the economy is actually the sum total of all the seasons and all the trends, it seems as though there is much to celebrate.

On the employment front, payroll jobs rose 288,000 in June, and private sector jobs were up 262,000 – the 52nd consecutive monthly gain. From January through June this year, private sector jobs rose 1.33 million, the most job growth in the first six months of any year since 1998.  The unemployment rate fell to 6.1% in June – down from 7.5% a year ago. The median duration of unemployment fell to 13.1 weeks in June – it was 17.1 weeks in December 2013. And average hourly earnings rose 0.2%; they’re up 2.0% from a year ago.  This is not rapid growth, but it is steady and sustainable growth.

Some point to the labor force – as opposed to the employment rate – and the fact that it has contracted by 128,000 in the past year. While true, it does not invalidate the positive job growth we’ve experienced.  The increase in the number of adults “not in the labor force” is clearly up, but this is largely due to aging Baby Boomers who are retiring.  With the sole exception of 2006, the number of adults “not in the labor force” has grown in every year since 1997.

Anecdotally, there is also one of Fed Chairman Janet Yellen’s favorite measures of labor market strength – the quit rate, which is the measure of those who voluntarily leave jobs.  The quit rate rose to 9.0% of all unemployed last month. That’s the highest quit rate since September 2008 and a sign of rising confidence in the jobs market.  Remember, people don’t tend to voluntarily quit in recessions.  They quit when they think they can get a better job somewhere else.  Anecdotal? Yes, but a pretty good gut-check nonetheless.

On the demand side, the trend is equally positive.  Final sales to private domestic purchasers, (an underlying measure of demand in the US) rose 0.5% at an annual rate in the first quarter and were up 2.3% in the past year. Preliminary data for the second quarter indicates we’re running at about a 3% growth rate.

In other words, the bears are wrong.  They’re missing the big picture (remember, there’s almost always a combination of positive and negative news on any given day), or they’re too committed to a political script to acknowledge a glass half full and rising.  Is the water rising too slowly? Yes, and that’s an issue which does need to be addressed for the long-term benefit of our kids and grandkids.  But the problems there are impediments to rapid growth, not causes for an imminent recession.

The bottom line for us remains our commitment to our clients as individuals who need reliable, objective information, not as Republicans or Democrats who need talking points.  We will continue to look at the data and call it like we see it.  Right now, we see an improving economy and are optimistic about the future.