UK voters decide tomorrow whether to stay in the EU or not. The vote is too close to call but the capital markets appear to think voters will decide to stay. If the referendum falls the other way, expect the markets to react very negatively on Thursday and Friday. The sell-off, if it occurs, is likely to be short lived and reversed quickly, outside of Britain, as investors realize that any negative economic impacts will primarily fall on the UK and take some time to be felt. The £ and UK equity markets may not rebound as quickly.
That being said, let’s turn our attention to other economic issues in the news. Last Friday, James Bullard (President of the St. Louis Fed), published a fairly pessimistic article about the US economy. While Dr. Bullard made some accurate and interesting points, an article that ran on the Bloomberg yesterday offered some very valid counter arguments.
With regard to the article from Dr. Bullard, he focuses on three areas of pessimism for the US economy. First, he is concerned about the fact that while unemployment has fallen to relatively low levels, inflation refuses to rise. This is not normal in his opinion and a sign of larger economic problems. Second, productivity growth has been disappointing at best during the recovery from the financial crisis. Finally, while he does not feel that a recession is imminent, the fragile nature of the global economy could push the US into recession at any time.
Dr. Bullard is accurate on all three of his points but the key question is; how will these issues develop as we move forward this year and next? Conor Sen, a reporter for Bloomberg, points out an interesting fact with regard to the first issue. There are some signs that wage growth is responding to the lower unemployment rate. He points to the Atlanta Fed’s Wage Growth Tracker (see graph below) which currently shows wages growing at 3.5%, the fastest rate since mid-2009.
With regard to productivity, it is typically the case that productivity growth lags as an economy comes out of a deep recession. The US experienced such a recession during the financial crisis. This is due to the fact that firms have a deep pool of relatively inexpensive labor to re-employ in the early stages of recovery. There is little incentive to invest in technology or labor saving capital. Only as labor markets get tight are businesses incentivized to become more productive. Falling commodity prices, as we have experienced the last couple years, also reduce the incentive for businesses to modernize. The question now is, with labor markets tight and commodity prices stabilized will productivity begin to increase?
If wage growth is accelerating, consumer spending may follow. If US businesses also begin spending to improve productivity, the economy may be further from recession than the Fed thinks.
Sources: Bureau of Labor Statistics, Atlanta
Disclosures: This piece discusses general market activity, industry or sector trends, or other broad-based economic, market , or political conditions and should not be construed as research or investment advice. The opinions expressed are those of the author and do not necessarily represent the opinions of Enterprise Bank & Trust. Past performance is no guarantee of future performance. No diversification strategy can guarantee against loss.