VOL. 129 | NO. 153 | Thursday, August 7, 2014
The Worldly Investor
Asia Feels Boost From US GDP
By David S. Waddell
Yippee, GDP! Last week, the U.S. government reported that GDP in the second quarter grew 4 percent and revised the first-quarter number upward from -2.9 percent to -2.1 percent. U.S. equity markets celebrated briefly and then became seriously fearful of Federal Reserve inflation countermeasures.
Fortunately, while higher reported U.S. GDP increased rate fears in the U.S., it also increased export hopes across Asia.
Over the last month, the mainland Chinese stock market (MSCI A-50) has appreciated 9 percent. Indonesia has advanced 8 percent, Hong Kong 6 percent and Korea 3 percent. Overall, emerging Asian markets have advanced 4 percent, compared with no change for the U.S. markets.
So while a surprising increase in U.S. GDP suggests higher interest rates weighing down U.S. stock prices, in Asia it suggests higher exports, higher earnings and higher stock prices. Couple increasing export demand with regional stimulus measures and comparatively low valuations, and Asia appears poised overtake the performance of a tiring U.S.
What moves the Fed? According to the Bureau of Labor Statistics, salaries and wages in the U.S. grew 1.6 percent over the last year. This remains consistent with the average annual increase of 1.7 percent, measured quarterly, since 2009. Compare this with average annual growth of 2.9 percent from 2001 through 2007 shows clearly that wages are in a funk. Salaries and wages account for approximately 70 percent of employee cost. Benefits account for the rest. Unfortunately, over the past two decades, the rise in benefits costs has well exceeded the rise in salary cost.
Since 2009, benefit costs have averaged annual increases of 2.3 percent, 35 percent higher than the increases in wages. Just prior to the recession, they were growing annually by 4.5 percent. So while wage growth has stagnated, benefit costs have soared. Nevertheless, when considering the weighted combination of wage and benefit costs, overall gains in compensation still remain low at below 2 percent, compared with 3 percent-plus pre-recession.
Although the headline unemployment rate in the U.S. has now dropped to near 6 percent, this is not the most comprehensive measure of unemployment. The Bureau of Labor Statistics reports several different unemployment measures each month, with the U-6 measure providing the broadest measure of unemployment. The U-6 measure includes the total number of employed and underemployed workers (marginally attached to workforce or part time seeking full time).
Today, this number stands at 12 percent of the U.S. workforce, a full 6 percent higher than the headline number. Prior to the last two recessions, the U-6 number dropped to 7 percent and 8 percent respectively. Even if this measure bottoms out at near 9 percent or 10 percent, it could take another 2 years to get there.
Bottom Line: A surprise in GDP growth and headline unemployment near 6 percent has increased Fed tightening fears. However, the absence of wage inflation and the significant slack in broader measures of employment will likely leave the Fed looser for longer.
Additionally, marketplace concerns may raise rates in anticipation of Fed action, further delaying the need for the action itself. Meanwhile, as America frets over the Fed, Asia will frolic over the renewed vigor in the U.S. economy.
David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates.