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This election season, the campaigns seem to have been particularly rancorous, especially for mid-terms. That is in part because of the extreme feelings generated on both sides by this President, but it is also because of a conscious decision by him and other Republicans to focus on immigration as an issue as election approaches.
That is presumably an attempt to increase turnout of Trump’s base but ask anybody on Wall Street and they’ll tell you that what the Republicans should be talking about is the economy. Friday’s jobs report amply demonstrated why that is so, but there is a school of thought that says they should be doing so now, before things turn.
Friday’s report was, when combined with other official data, about as good as it gets. Non-farm-payrolls (jobs in the economy) increased by 250k, well above the consensus 190k estimate going in, with the unemployment rate holding steady at near record lows. More significantly for many Americans, that labor market strength seems to be finally putting upward pressure on wages, which grew by 3.1%, the most since 2009.
Without context, that increase in average wages could have caused a big selloff in stocks as it makes another rate hike this year a virtual certainty and increases the chances of more next year. However, in the context of core inflation that remains around 2% and the fact that job growth is still robust after three hikes already this year, it looks more like good news than bad. The market certainly took it that way, but there are reasons to believe that, as good as the data was, it contains hints of problems to come.
Wage growth of 3.1% is in the “Goldilocks” range. It is enough to give a boost to consumer spending, and therefore GDP growth, but not enough yet to result in any serious upward pressure on prices. The problem is that, as we have seen throughout the recovery, wages are slow to respond to a tightening job market at the moment, making it likely that what we saw this month is the beginning of a trend that could quickly get out of hand.
Remember the Fed has two mandates, to strive for full employment and price stability. You cannot blame them for feeling that on the jobs front the mission has been accomplished, but that was done by adopting aggressive, proactive measures. If they bring the same mindset to countering the threat of inflation it will come as a major shock to a market that has become accustomed to free money and low rates.
What they have done so far has been quite easily withstood by a strong and growing economy but that will change quickly if they decide that slowing growth significantly is the right thing to do for the long-term good or inadvertently overstep the mark. There are indications that we are close to that mark already.
Growth-sensitive commodity markets such as oil have faltered after responding to the strong growth figures earlier this year and, more importantly in many ways, the dollar is at its highest point for several years.
Upward wage pressure can easily be absorbed by an economy that is firing on all cylinders, but dollar strength will have a much faster effect that is harder to avoid. It makes exports from the U.S. more expensive and no matter how much some in the administration may try to deny it, the American economy is based on trade.
To a wonk like me there is a beauty to this. The strong economy makes the currency attractive, then a stronger currency slows the economy. If that goes too far then it works in reverse.
The point is though that there is very little policy-makers can do about it. It is controlled by Adam Smith’s “invisible hand.” You can negotiate all the deals you want, but if American goods aren’t competitive, it will slam the brakes on growth.
So, as strong as Friday’s data report was, there may contain a danger to that strength. For now, however, things are better than they have been for a long time. You can argue that if the stock market is your guide, Trump still has a long way to go to beat Obama, who presided over a tripling of the S&P. Or, as I would prefer to argue, the economy does its thing despite, not because of, politicians.
Even so, economic strength like this is rare going into an election and the Republicans could be wasting a major opportunity by not focusing on that full time.