Last Friday marked the 70th anniversary of the Allies’ invasion of France at Normandy. Seven decades later, Operation Overlord (as it was called) is remembered as a resounding success. However, historians and the men who were there will tell you that the operation did not go exactly according to plan. There were setbacks. Airborne troops missed their drop zones, some troops unexpectedly fierce resistance from a crack German unit which Allied planners did not expect to be there. Once off the beaches, the progress of Allied troops was impeded by hedgerows, which made very effective defensive positions for the enemy. Still, Allied troops pressed on.
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The Longest Day
However, reports from the day indicate great disappointment in the progress of Allied troops. The British were supposed to capture the strategic town of Caen Allied troops were supposed to capture the towns of Carentan, St. Lo and Bayeux on the first day. They failed to take any of these objectives on schedule. A person reading this without already knowing the eventual outcome might conclude that Operation Overlord was a dismal failure. However, history has taught us that the Allies adapted, improvised and overcame unexpected challenges. In retrospect, it appears that the only failure was that Allied leaders had unrealistic expectations for the timing of the success of their plans. They underestimated the challenges posed by terrain, weather and the competence of the enemy.
If we fast forward to the current economic expansion, we see similarities. Following the bursting of the housing bubble and the financial crisis, it was assumed by policymakers and most economists that the economic recovery would be “v-shaped” and that aggressive Fed monetary policy would ensure that outcome. It was thought that extremely accommodative policies would spur lending and leveraged spending by consumers and a sharp rebound in GDP growth, hiring and wage inflation. However, the economy has disappointed those who predicted a sharp and robust economic recovery. The question which has often been asked during the past several years has been: What is broken in the U.S. economy?
We would argue that nothing is broken per se. The problem is that many policymakers and economists underestimated the challenges facing the economy and overestimated the benefits their plans could provide. If one looks at recent economic data, it really is not very different from past expansions. If we look at Nonfarm Payrolls from July 2003 (the month after the Fed lowered the Fed Funds Rate to 1.00%) to November 2007 (the month prior to the beginning of the last recession), we see that Job growth averaged 149,940 jobs.
Since November 2009, the economy has added an average of 157,280 jobs per month. That is a bit better than in our 2003 to 2007 sampling. However, look how much less volatile hiring has been. If job growth has been consistent with prior recoveries, why hasn’t the economy grown at a faster pace? First of all, households have been unable and/or unwilling to carry large amounts of debt during the current expansion.
As you can see, although credit growth has turned positive, credit expansion remains very low. When we review the Federal Reserve US Household Debt Service Ratio Mortgage SA, we see that household mortgage debt service has declined and remains low.
The question which must be asked is: Is the low amount of household and mortgage debt too low? The knee-jerk reaction has been to assume that household debt levels and ratios must return to past norms. This might not be the case this time around. The answer to the leverage and growth questions might lie in wage growth data. Average Hourly Earnings data released last week indicate that wages are now growing at an annual pace of 2.1%. If there is one area in which employment data has disappointed, it is in the area of wage growth. Although job growth is about on par with the last expansion, wage growth has underperformed significantly.
Average Hourly Earnings since 2007 (the limit of available data) Source: Bloomberg & BLS:
Annual Personal Income since 1990 (source: Bloomberg):
The lack of wage growth has helped to keep inflation pressures low. It comes down to a chicken or the egg question. Will higher wages lead to increased household debt or will increased borrowing fuel wage growth? In the recent past (since the Fed began a nearly three-decade fall in interest rates) it has been consumer borrowing which has led to greater consumption, hiring and wage pressures. Now with lower levels of household debt, global competition for jobs and technological advances, generating greater wager pressure could be problematic, or is it?
What are the Fed’s dual mandates? They are price stability and full employment. As such, unemployment which is expected to fall below 6.0% by year-end, headline inflation approaching 2.0% and wage growth data which is pointing to relative price stability would appear to be desirable for the Fed. What is troubling the Fed is that it has taken monetary policies consistent with a deep recession to generate trend growth and to push inflation and job growth close to the Fed’s targets. Maybe the problem is with the Fed and economists have unrealistic expectations.
Just as, in retrospect, Allied leaders should have been delighted with the progress made by Allied troops in the opening days of the Normandy Campaign, it is our opinion that Fed officials and economists should be satisfied that the U.S. economy has done as well as it has since the recovery began, considering the economy has gotten very little assistance from fiscal policy, global demand and demographics.
- November 2012 – Present, Wealth Strategies & Management LLC, Stroudsburg PA
- December 2011 – November 2012 – Bond Squad, Kunkletown, PA
- April 1988 – December 2011, Citigroup and predecessor firms, New York, NY
- June 1986 – March 1988 – E.F. Hutton, New York, NY