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Slow Lags and Hard Landings
Its friday afternoon here at NDN, which must means its the perfect time to sneak out some bad economic news. And whats this? Indeed, its glum news on wages tip-toeing out of the back door of the Commerce Department. Marketwatch gives a good overview, reporting that these revised figures show that "the growth of employee compensation, already thought to be the slowest in any post-World War II recovery, has been even weaker than previously assumed." And today's figures, while rising, are doing so slower than inflation. As Jared Bernstein writes over at Brad De Long's place, "real compensation (wages plus benefits) has declined, on a yearly basis, for the past four quarters."
Normal economic theory suggests that a mix of rising economic growth and productivity will lead to higher wages and incomes. There has been a debate as to why this isn't happening. Some say, as we said earlier this week, that this is because of underlying changes in the nature of the global economy. Others claim there is simply a lag between growth and wage increases. But one precondition for the lag theory to be right is that the economy must keep growing long enough for the lag to kick. Bad news, then, that this isn't what seems to be happening. Today's GDP figures show that growth more than halved in the second quarter, down to 2.5%. The slowdown was expected, and the growth level is historically respectable. But it has certainly commentators cleverer than I furrowing their brows, and talking darkly of slow downs and recessions. The Economist highlights fears of an economic slowdown combined with inflationary pressures, and as usual hits the nail on the head:
The unexpectedly slow rate of growth comes just as there are reasons to worry about the underlying economy. Consumer spending has remained astonishingly high recently but only because Americans are increasingly willing to borrow, largely on their now-more-valuable homes. Personal-savings rates have been negative since the second quarter of last year. The share of household incomes devoted to servicing debt is at an all-time high.
Whats going to happen? As usual, nobody know. Some seem optimistic. The IMF thinks we're heading for a "soft landing" with lower growth. Others, like the hawkish folks over at the Hamilton Project earlier this week, worry that continuing global imbalances could combine with reckless fiscal management here at home to deliver a hard landing, complete with a slide in the dollar, higher interest rates and lower growth. The only thing that can be said with certain is that whether the economy slows soft or hard, a slowing economy is very unlikey to produce rises in incomes. Could this be the first complete economic cycle since the second world war to see no increase in real incomes at all? Watch this space.