James Hotchkiss at CUNA EIC 2016

U.S. economy grows despite global concerns

Countries around the world are easing monetary policy, while the Federal Reserve looks to tighten.

August 8, 2016

The U.S. and global economies have engaged in a tug of war, says James Hotchkiss of the Federal Home Loan Bank of Chicago.

The U.S. economy is doing well on many fronts, while the disruption in various markets around the globe causes some concern at the Federal Reserve.

The tug of war is most evident when comparing monetary policies. The U.S. is one of the few countries trying to raise interest rates right now, says Hotchkiss, assistant vice president and director of quantitative analysis, during the CUNA Economics & Investments Conference in Chicago.

“It is really hard to raise interest rates when the rest of the world is easing monetary policy,” says Hotchkiss.

Global concerns include:

  • A still-recovering European economy;
  • Geopolitical risk such as the long-term impact of Britain’s exit (or “Brexit”) from the European Union; various independence movements in places such as Scotland and Catalonia, Spain; and the migrant crisis; and
  • A highly uncertain, but improving, expectation for growth in China.

On the home front, employment numbers are good, the housing market is steadily growing, and gross domestic product is expanding, albeit at a slower than normal rate, Hotchkiss says.

“I’m optimistic,” he says.

But Hotchkiss did try to tackle one problem troubling economy-watchers: The lack of wage growth even though “the employment side of the market is doing very, very well.”

His explanations for slow wage growth:

Entrepreneur slowdown. Since the recession ended, new firms have accounted for only 11% of all new private-sector jobs created, below the 15% of jobs created during the last expansion.

Aging workforce. Delayed retirements since the recession led to a lower percentage of prime-age workers in the labor force. This could lead to lower wage growth because the majority of large wage increases occur during the early period of workers’ careers.

Lagging job churn. While the level of job quits has risen substantially, the level of workers moving immediately from one job to another remains at low levels.

In expansionary environments, job switchers earn roughly one percentage point more on average than those who remain at their jobs.

Structure mismatch. The new jobs being created might not match well with the talents of unemployed people. For instance, new job creation in the tech sector will not likely help construction workers.

The location of jobs also might be mismatched with the people who need employment.