Industry-specific slowdowns combined with exceptionally low unemployment levels suggest that the US may be closer to the end of this economic cycle than many believe. Without more workers, sustaining economic growth may prove difficult.
While we spend a lot of time discussing macroeconomics such as interest rates and fiscal stimulus, microeconomic issues often get short shrift. At the end of 2016 we published a graph that showed how some of the key economic drivers of this recovery were beginning to fade. Six months later, that fading process has yet to reverse itself, with the possible exception of oil and gas.
Motor and Housing Normally Kick-Start Recovery
As you might recall, most recoveries feature big, bold rebounds in auto and housing due to lower interest rates. Growth in these two labour-intensive sectors, where consumers can leverage their purchases, helps raise overall levels of economic activity and acts to jump-start economic activity in other sectors.
During this recovery, tight mortgage credit has caused a slower, but perhaps longer, recovery for the housing sector. Motor vehicle credit, because of a better delinquency track record compared with mortgages, has flowed much more easily, leading to a more typical auto recovery.
This Recovery Had Different Early Drivers
Still, this recovery was based on the dynamics of a number of sectors not normally thought of as key economic drivers. Specifically, a huge ramp-up at Boeing for the production of the 787 Dreamliner and the revamped 747-800 had an outsize impact on this recovery. At $200 million or more per 787 and a ramp-up from zero to 12 aircraft per month, the new plane was enough to move the U.S. economic needle.
New Oil and Gas Technologies Were Big Help
Also, the revolution in technologies enabling more U.S. production of oil and gas, which previously experienced more than two decades of production declines, was a new dynamic for the economy. While the graph above features oil and gas production levels, the spending on the equipment and materials to produce that oil was even more dramatic and began even earlier.
Motor Vehicle Recovery More Dynamic
We mentioned that motor vehicles had their normal recovery bounce. However, even that recovery was bigger and more dynamic than the unit data above might suggest. Because of U.S. tariffs on light trucks – which include minivans, SUVs, and pickups, more of the U.S. sales went to U.S. producers. Light trucks are substantially more expensive than sedans.
Healthcare and Restaurant Sales Bounce
The combination of an aging population, new technologies, and industry pricing power has generally made healthcare an important contributor to economic growth, especially as government programs to pay for healthcare have been expanding for more than 50 years. Healthcare growth got an extra shot as the Affordable Care Act extended Medicare to an additional 15 million, with most of those recipients added between 2014 and 2016.
We believe spending by these additional participants caused the big bounce, big by healthcare standards, anyhow, from less than 2% growth to more than 5%.
Many things can change the dynamics of restaurant spending. However, we think employment growth is probably one of the main factors. Recall that improved investment spending, airplanes, shale oil production equipment, drove a lot of the early recovery, and that employment growth healed a bit later than normal. Restaurant sales were quite good albeit not stupendous early in the recovery.
Demographics of more young workers certainly helped. However, the acceleration in employment growth after 2012 and wage growth after 2014 helped jump-start restaurant sales. Lower-cost restaurant space, resulting from the closure of a lot of big-box stores, also fuelled the supply side of the equation.
Key Drivers Have Petered Out
Automobile and aerospace growth rates peaked in late 2012. Fortunately, this was about the same time that healthcare and restaurant sales began to move out of their periods of more-staid-than-normal growth. And in 2014 there was another spike in oil and gas production, helping maintain overall economic growth rates. However, by early 2015, all five of what we viewed as the major growth drivers were in retreat.
Sources of Potential Growth?
Admittedly, we cherry-picked items to talk about as they were the categories we have featured in our columns during the recovery. However, what will replace these items is not entirely clear. Certainly, the shift to grocers from restaurants is helping the food production industry. Believe it or not, the food industry is the largest "manufacturing" industry in the United States at close to 15% of the manufacturing sector.
In terms of production, the food industry has seen a bump to 3% growth. Over a long period of time, that number has never been much higher than 1%. Unfortunately, the restaurant industry employs 11.7 million workers, while just 1.6 million work in food-related manufacturing. Technology-related consumption and production are also bright spots.
Unfortunately, this is a small sector, with about 1 million tech-related manufacturing jobs. And even as tech production pushes above 4%, we note that tech employment is down year over year. We love the higher productivity, but better results won't necessarily help overall employment and put more dollars in consumers' pockets.
