The U.S. economy is on fire.
According to the Atlanta Fed’s model, the gross domestic product is headed for a 4.5 percent annualized growth pace in the fourth quarter. The U.S. economy has enjoyed three straight quarters of 3 percent growth, something we have not achieved since mid-2004.
We now have added jobs for a record 86 straight months. All five regions in the U.S. are reporting strong numbers.
How will the Fed Reserve respond? The Fed is expected to raise interest rates this week, for the third time this year, and could do it three more times next year. Boston Fed President Eric Rosengren said at a Northeastern University Economics forum Friday that the Fed should continue to raise rates to prevent the U.S. economy from over-heating. He is worried that the economy seems to have moved beyond the point of maximum sustainable employment.
“It is quite likely that unemployment will fall below 4 percent, which is likely to increase pressures on inflation and asset prices," Rosengren said.
Tom Gimbel, chief executive of the LaSalle Network, said, “It is a really, really strong economy. Companies want to take advantage of the economy, so they want to hire while the getting’s good.”
The Labor Department reported Friday that the U.S. added 228,000 jobs in November and the unemployment rate remained at 4.1 percent, the lowest level since 2000. Household income, which encompasses not only hourly pay but also how many people have jobs and the number of hours they are working — have shown strong gains. Particularly welcome is data showing that lower-income households are doing relatively well.
The Republican tax plan, which aims to encourage business investment by cutting corporate taxes, will provide further stimulus. Hopefully, it will lead to an increase in demand for big projects — hospitals, airports and office buildings.
But businesses are facing an unusual confluence of events. On the one hand, we now have a labor shortage. On the other hand, workers are not seeing bigger increases in their paychecks.
Average hourly earnings were only up 2.5 percent in November from one year earlier at the same time that, for the first time in six years, chief executives surveyed by the Business Roundtable, a coalition of big corporations, reported that labor expenses were their biggest cost pressure in the fourth quarter.
That might be changing to some degree. Paul Ashworth, chief U.S. economist at Capital Economics, predicts that we can expect wage acceleration above 3 percent in 2018.
Catherine Barrera, chief economist on the job website ZipReporter, said wages will pick up when workers gain the confidence in the economy to demand raises — and to change jobs if they do not get them.
That confidence might be growing. Nearly 9.5 million workers quit their jobs voluntarily in the third quarter. Employees voluntary leave of jobs when they are confident of finding new ones and are gaining the bargaining power to start demanding and winning higher wages.
The stock market reflects our strong economy. The S&P 500 has nearly tripled since its low point on March 9, 2009.
Not everyone is so hopeful. As the late, legendary investor John Templeton once said: “Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.”
But I see life differently. Unlike Templeton, who emphasized the psychology of a bull market, I focus on business and economic fundamentals. My current optimism stems from strong corporate earnings that derive from global and U.S. economic prosperity. And I know that the likely decrease in corporate taxes will enhance earnings.
I am so confident that the rally will continue that I celebrated by buying beautiful 18-carat cufflinks. If you see an older gentleman drinking a latte, smiling broadly and wearing fancy jewelry, please introduce yourself. I love company.
Sarasota resident Ernest "Doc" Werlin spent 35 years in fixed income as a trader and corporate bond salesman, including time as a partner at Morgan Stanley in charge of corporate bond trading. Send suggestions and comments to doc.werlin@gmail.com. Read past columns at docwerlin.com.