September 05, 2013 | By Scott Minerd
Throughout this year, the consensus view has been that current economic weakness is justified and we are just one or two quarters away from faster growth. Now, in the third quarter we are hearing the same arguments, although growth targets are starting to dip. I call this the growth mirage. In the heat of the desert, the eye perceives water on the horizon, but the closer one tries to get, the farther away it moves – until the traveler realizes that he has been chasing an illusion caused by shimmering layers of hot and cool air. The effects of higher mortgage rates continue to flow through to weakness in the U.S. housing sector and although some pundits point to resilience in manufacturing and consumer confidence as positive economic signs, my view is that a meaningful downshift in data could yet occur. Retail sales and chain-store sales disappointed during the critical back-to-school shopping season. And although we have had four fairly strong months of job creation, most of the new jobs have been part-time, explaining why aggregate earnings are flat and why spending has not increased with personal income gains. Over the coming month, uncertainty and market volatility will likely rise as the U.S. Federal Reserve makes its decision on tapering its asset purchases, Congress begins its fractious budget and debt-ceiling debates, Middle East geopolitical risks increase, and German elections take place (on September 22). The good news for the U.S. economy is that while economic activity is not robust, the current modest pace of growth is unlikely to be derailed. As one of my favorite economists, Ed Hyman, said, there is not a lot of speed in the economy, but at least there’s a lot of torque. All of this means an increased risk that interest rates will move higher as investors digest new economic data.
Growth in part-time jobs has been the main contributor in overall employment increases since the start of 2013. Over the past seven months, the average monthly growth in full-time jobs has been 32,000, while the average number of new part-time jobs was 104,000. After falling from the recession peak of 20 percent, the share of total jobs which are part-time has recently rebounded to 19.6 percent. The increase in part-time jobs may be partially attributable to the upcoming change in healthcare laws, requiring employers to provide health insurance to full-time employees but not for part-time workers. If the trend continues, the increasing share of part-time workers may add downward pressure to aggregate labor earnings and reduce consumption growth.
Source: Haver Analytics, Guggenheim Investments. Data as of 7/31/2013. *Note: The seasonally adjusted data for full-time and part-time workers does not add up to the seasonally adjusted total employment because total employment is seasonally adjusted independently of full-time and part-time workers.
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Global CIO Scott Minerd and Head of Macroeconomic and Investment Research Brian Smedley provide context and commentary to complement our recent publication, “Forecasting the Next Recession.”
Anne Walsh, Chief Investment Officer for Fixed Income, shares insights on the fixed-income market and explains the Guggenheim approach to solving the Core Conundrum.
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