Customer Spending Plus No Inflation is Best

Interesting story today over on Market Watch.

In the decade since the U.S. basically gave up on manufacturing to do it cheaper overseas while building a service economy at home, the only real driver of economic growth is customer spending. As long as customers are buying, American companies can keep importing goods from China and making a profit. Meanwhile, the service economy runs along in the background to give Americans the money to spend.

Ironically, the only thing that moves slower than trying to adjust the economy with interest rates is trying to adjust the thinking of economists who insist on pretending that America has basically the same economic structure it did two or three decades ago. This disconnect is the root cause of much of America’s economic stress.

Today’s super Goldilocks article notes that American consumer spending increased in July, with (still) no increase in inflation. In the reality of today’s U.S. economy this is literal perfection. Business can continue to grow, consumers can continue to spend, and companies can hire, all with no currency blow back issues.

But, old school economists and the money shufflers on Wall Street can’t see this. All they remember are no longer accurate indicators that suggest that maybe/sort-of/kind-of/soon there might be an issue that requires adjusted monetary policy.

us wages economy

The only bad news is that customers didn’t actually have enough money to handle the increased spending. As a result, the savings rate fell from 8% to 7.7%. That isn’t good over the long-term, but there’s no reason the panic.

The problem, as it has been since the start of the Great Depression several years ago, is that there is simply no wage growth. Here is the irony. What is holding inflation down is the lack of wage growth as well. So, while economists wring their hands about all other manner of economic benchmarks, the only thing that matters to the overall U.S. economy is wage growth. Everything else is irrelevant.

So, where are we?

Politicians and economists are fighting over what the Fed should do, when the answer is that it probably shouldn’t be doing anything. For now, the only thing that matters is no wage growth = no inflation. The only way for things to go back south is for unemployment to increase. Obviously, without wage growth, still-working consumers cannot back fill for a decreasing number of workers.

As an investor, the only thing to watch is jobs. Everything else is the noise that may knock jobs around. If jobs stay the same or increase we get additional slow growth. If jobs start to decline or layoffs start happening, that’s the end of the expansion and the start of the next recession.

If we actually got any sort of wage growth that might be time to worry about inflation, but for now, businesses somehow have a dominant hand in the wage market, so I wouldn’t be worrying too much about that.

As always, long-term investors should stick to their well-diversified portfolio constructed for their time horizon and risk tolerance and ignore all of the noise.

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