The Monthly Muse - April 2015 edition

The Monthly Muse


Brought to you by Younker & Kelly


As part of our commitment to bring you relevant economic news on a regular basis – here is the latest installment of the Monthly Muse.


      Steady hiring is supposed to fire up economic growth, cheap gasoline is supposed to power consumer spending, falling unemployment is supposed to boost wages and low mortgage rates are supposed to spur home buying. America's economic might is supposed to benefit its workers. So what is happening?

      There is little doubt that at the beginning of 2014 the weather played a substantial role in holding back the economy and in the following months the economy did very well. This year may very well be the same. Homebuilders broke ground on 17% fewer homes and retail sales fell in January and February. “Losses to construction and some moderation in retail hiring relative to last year suggest unusually harsh winter weather played some role in explaining the weakness,” said Diane Swonk, chief economist at Mesirow Financial.

     Another factor that played its part is the value of the U.S. dollar. Many US factories ship their products worldwide and the relative strength of the US economy – and therefore the dollar – has put many of these businesses at a relative disadvantage. For example, goods from US factories are about 20% costlier in Europe than a year ago. This has lead many, such as Maryland-based Marlin Steel, to hold off on hiring more workers. “It’s not just me selling into Europe – it’s all of my clients selling into Europe,” says Drew Greenblatt, president of Marlin Steel. “They’re all dealing with the pain”.

     We talked about the collapse in the price of oil in one of our previous blog posts and it is still a major factor into our stagnant economy. The price of oil has more then halved since last June, resulting in many oil companies having to layoff employees, reign in their budgets and order less equipment. In theory we should see consumers spending the money they are saving at the pumps on other things but this has yet to happen. Many economists think that as the summer approaches we should start to see an increase in consumer spending.

      Another common theme is the dismal pay hikes. Average annual wage growth is at a dismal 2.1% despite the unemployment rate in the U.S. falling from 6.6% to 5.5% over the course of the last year. One theory about the meager pay raises is that the unemployment rate needs to drop even further. The Federal Reserve states that a normal economy should have an unemployment rate as low as 5%.  However, another possibility is that a readily available pool of potential global labour is keeping the price of labour down.  In recent years, the global labour pool has added more than 3.5 billion working-age people from emerging economies. This increase can suppress US pay growth.

      An interesting theory many economists share is that increased automation in business is contributing to the slow growth. A survey of Harvard Business School alumni released in September found that nearly half would rather invest in technology than hire or retain workers. Even smaller businesses are feeling the pressure to automate as much as possible. Many small businesses are spending money on automating their ordering systems, or creating more of an online presence.

     As we have stated in our previous blog posts, we still see the U.S. market as being the stalwart of the financial markets, even if it has hit a bit of a soft patch.





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