The US unemployment rate plunged to 4.6% in November from 4.9% last month as a decline in the labor force finally moderated its very rapid pace of growth — which has in recent months cloaked the ongoing improvement in the jobs market. Over the past year, the unemployment rate has declined 0.4%, while the labor force has grown 1.3% — well above the 0.8% growth rate for work age population.
This spreading of the wealth from new jobs to a broadening pool of new entrants has continued to mitigate wage inflation – which following a -0.1% decline in November was up just 2.5% over the past year. With the Federal Reserve’s favored PCE inflation measure up 1.4% over the past year (1.7% in the core), real wage gains are running only slightly faster than admittedly weak productivity growth — leaving unit labor costs very well behaved.
Eight years into this economic cycle, profits returned to robust growth in the third quarter of 2016, and remain at a share of GDP that suggests a least two more years of expansion before they fall to a level that signals job cuts.
President-elect Trump is inheriting a mid-cycle economy that one would normally expect to be on the verge of capital spending driven growth, accelerating wages and inflation, and tightening monetary policy. It is the phase of the cycle where corporate confidence is critical to sustaining the expansion, as it depends more on developing new ideas and markets than on returning to the levels of the past.
The essential question is whether the benefits of pro-growth policies for lower taxes and reduced regulation will be Trumped by reductions in free trade via tariffs, currency wars or new regulations and restrictions at the borders which disrupt existing supply chains more than domestic optimism develops new economic activity. This is not a moot point as the vast bulk of US economic development that will be spurred by lower regulation and taxes is directed at improving global trade and economic activity.
That is why there are $2.5 trillion in foreign earned profits sitting offshore awaiting repatriation (equal to about a year and a half’s worth of domestically earned profits). Roughly 20% of NIPA profits and 50% of S&P revenues are earned abroad. As the suburbs of the world, it is the export of our ideas, rather than our products, which provides the comparative advantage from which we all inevitably benefit.
The key to the ongoing moderation in wages remains the significant underutilization of the workforce, despite a rosy headline unemployment rate. At 4.6%, unemployment is just 0.2% higher than the 2007 low — and 0.8% above the record low set in April 2000 (just before Y2K layoffs began).
However, the broader U-6 unemployment rate, at a cycle low of 9.3%, is still well above the 7.9% December 2006 low and 6.8% 2000 low. On a relative basis, U-3 unemployment is 21% above its 2000 low while under-employment measured by U-6 is still 36% higher.
Were it not for the decline in labor force participation rates, we would be looking at a 5.3% U-3 rate. History tells us that wage growth does not accelerate until we are below the NAIRU (non-accelerating inflation rate of unemployment) which is currently estimated at between 4.7% and 5.0% depending on the model.
Not surprisingly, when we first passed a 9.3% U-6 last cycle in December of 2004 the unemployment rate was 5.4%. In the previous cycle in March of 1997, the U-3 was 5.2% at the same point. Wage inflation was still a distant threat at that point in those cycles and an upswing of the capital spending cycle was just beginning — with a bit more than two more years of expansion ahead in both episodes.
The Presidency of Wendell Willkie
As we noted in last week’s missive, we are firm believers in Santayana’s insight that those who do not remember the past are condemned to repeat it – so we read a lot of history. So, we have been trying to decide what Presidential comparisons we should consider for Donald Trump.
Is he like Teddy Roosevelt and Ronald Reagan? Both were outsiders in their own party who fought against the prevailing elite.
TR, made famous as a Rough Rider, was elected VP primarily to keep him away from the very levers of power he attained on McKinley’s assassination in 1901.
Reagan ran against the unelected President Ford, still the establishment pick, which helped Carter win — before Reagan’s own ascension to the presidency.
Teddy attacked big businesses, who were the elite of the day, through aggressive anti-trust legislation.
Reagan’s focus for reform was on big government.
Both were major supporters of America First, with Roosevelt acquiring Panama and Reagan tearing down that wall.
Will Trump as an outsider pick on big businesses like UTX/Carrier or AT&T/Time Warner? Or will he drain the swamp? Or is his elite enemy the network of international organizations controlling trade and promoting globalization that don’t believe in America First?
An alternative suggestion is that Trump is Jimmy Carter, another outsider who came to Washington, but filled his administration with loyalists who shunned the existing elite. That did not work well.
However, Carter’s colleagues were truly outsiders from Georgia, where Trump’s billionaires may be from outside government, but they know exactly how the system works and how to work the system.
Last weekend, as we were reading over the Thanksgiving break, we had an epiphany. The candidate most like Donald Trump was Wendell Willkie, the Democrat turned Republican in 1939 who lost to FDR in his third election in 1940.
Our rationale for this observation is based on the work of Neil Howe and William Strauss who illustrated the 80 year cycle, encompassing four twenty year generations, in their books Generations and The Fourth Turning.
We invite readers to consider two political cycles starting eighty years apart – one beginning in 1901 with Theodore Roosevelt and the second in 1981 with Ronald Reagan. We have noted some of these Presidents similarities above — but it is far more interesting to consider what followed as a guide to where we might be now.
Both Teddy and Ronnie were so popular that they appointed their successors – William Howard Taft and George H.W. Bush. Both of whom were unpopular enough that they only held office for one term, primarily because of third party challenges originating from within their own party – TR himself ran against Taft as a Bull Moose and Ross Perot as a populist independent against Bush.
The split of the Republican vote lead to the elections of Woodrow Wilson with 41.9% of the vote and Bill Clinton with 43%. Both of these Presidents faltered late in their terms, Wilson because he had a stroke and Clinton due to the Lewinski affair.
In 1920, William G. Harding was elected as “a return to normalcy” continued by Coolidge and Hoover. In 2000, George W. Bush was elected on a promise to return to the policies of Reagan.
All these Republicans practiced a laissez-faire attitude to the economy, which led to a go-go period of growth in the Roaring 20’s and the credit crazed Aughties — followed by the deepest recessions of their lifetimes. Wave elections swept in Democrats FDR and Obama, who presided over slower than expected economic recovery for two terms.
Then Hillary Clinton attempted to continue Obama’s legacy, while FDR kept the ball himself. Both elections came amid post-depression periods of globally rising economic isolationism — compounded in the US by a strong distaste for military intervention abroad. The Republican candidate in each election was a political neophyte and businessman from well outside the Republican Party’s norm — but where Wendell Willkie lost, Donald Trump was victorious.
So now we find ourselves in a parallel universe as our decades long political mirror has been cracked. Under FDR and Truman, the Democrats held sway for another 12 years.
Under Trump, most of Obama’s legacy will likely be reversed — soon.
Like the comparison of the Lincoln and Kennedy assassinations, we can name many similarities.
Both had immigrant parents, Trump’s mother was a Scot and Willkie’s father was German. Both had discipline problems as teens and went to military school. Both were New York businessman before running for President. Both were known to shoot from the lip resulting in faux pas. Both had issues with women voters (Willkie once promised his Secretary of Labor “will not be a woman either.”)
And both had better relationships with their opponents before the election than with the elite of the party they represented.
Unfortunately, we do not know what a Willkie presidency would have looked like or if our historical timeline of political pairings will ever be reestablished. As with every trend following pattern, it worked until it didn’t — and now we must seek a new perspective.