NZ v US — we’re not the losers
Is America booming while New Zealand declines? That’s not what the statistics say
The idea seems to have taken root that the United States economy is going strong.
So strong, that the question for the mid-term elections in November is whether the Republicans’ don’t-mess-with-success message will outweigh dismay and disgust at President Donald Trump.
On the face of it, the sort of indicators that get trotted out as talking points are impressive: annual growth rate 4.2 per cent; unemployment rate 3.9 per cent; the strongest wage growth since the recession.
But look a little closer — and use New Zealand’s comparable numbers to calibrate the scale — and some of the gloss comes off.
The 4.2 per cent economic growth rate that gets brandished reflects the peculiar American practice of taking the latest quarter’s gross domestic product growth, multiplying it by four and calling that the annual rate. The June quarter’s GDP growth was a touch over 1 per cent, making 4.2 per cent on this annualised basis.
But in March the same needle pointed to 2.2 per cent, and in the December 2017 quarter 2.3 per cent. Less to crow about there. It is a volatile, noisy and eccentric way of expressing annual economic growth.
Using a more conventional annual percentage change, which compares output in the June quarter with the June quarter last year, the growth was 2.9 per cent.
That is not bad, but it is not a whole lot stronger than the 2.7 per cent recorded in New Zealand in the year to March. We are still waiting for our June quarter GDP numbers, but the average pick among forecasters is for 0.8 per cent, quarter on quarter — not a lot weaker than the US managed.
Looking forward, the consensus forecasts compiled by NZIER and reported this week expect annual average growth in New Zealand in the current March year to be 2.8 per cent, rising to 3.1 per cent in the year to March 2020 before easing to 2.9 per cent the following year and 2.7 per cent the year after.
A similar survey of professional forecasters by the Philadelphia Fed, released on Monday, on the same annual average basis, projects growth of 2.8 per cent in the United States this year and again next year before slowing to 1.8 per cent in 2020 and 1.5 per cent in 2021.
One important difference is that US growth is currently underpinned by extraordinarily loose fiscal policy, with the Federal budget deficit expected to approach US$1 trillion or 5 per cent of GDP in the coming year.
It is the most pro-cyclical fiscal policy since the Johnson Administration, the International Monetary Fund reckons, and they do not mean that as a compliment. When the stimulatory impulse from those tax cuts fades, as it must, and the sugar rush wears off, what is left is the debt that financed it.
In New Zealand, the Government is running a budget surplus.
What about the US unemployment rate of 3.9 per cent, an 18-year low? Got to be better than 4.5 per cent here, right?
But the unemployment rate is a ratio whose denominator is the labour force, which is affected by the participation rate — the proportion of the working age population either employed or actively seeking work, which you have to be doing for the statisticians to count you as unemployed.
The US labour force participation rate fell another 0.2 percentage points in the June quarter to 62.7 per cent, down from 66.1 per cent 10 years ago and well below New Zealand’s 70.9 per cent.
If we had the same low participation rate as the US, our unemployment rate would be 4 per cent; if they had the same high participation rate as New Zealand, their unemployment rate would be 4.4 per cent.
The employment rate — which is the proportion of the working age population who are employed — is 60.3 per cent in the US and 67.7 per cent here.
What about the US wage growth reported on Friday — private sector average hourly earnings? At 2.9 per cent for the year, that may be the strongest since the recession, but it only matches the US CPI inflation rate of 2.9 per cent. So the increase in real wages was zero, zip, zilch, nada.
Statistics New Zealand’s June quarterly employment survey found private sector average hourly earnings up 3.3 per cent on a year earlier, while the inflation rate was 1.5 per cent.
Meanwhile, the US sharemarket continues to enjoy a bull run of venerable antiquity even if concerns are mounting about escalating tariff wars, or that the Federal Reserve will overdo the tightening it has under way.
But one of the factors underpinning the market is that the tax reforms enacted late last year removed a disincentive to US multinationals repatriating the accumulated profits of their foreign subsidiaries. One result has been a rash of share buybacks, totalling US$675 billion ($1.03 trillion) in the first half of this year, which pushes up share prices.
The US bond market, on the other hand, tells a more sobering story. The yield curve has flattened. There is now a spread of only 24 basis points or so between two-year and 10-year bond yields.
The risk is that the curve inverts — so that short rates are higher than long rates — because that is usually a harbinger of recession.
New Zealand’s yield curve is “normal”, in the jargon. At the time of writing, it has a spread of 95 basis points between two-year and 10-year government bond yields.
So to sum up:
On a comparable annual average basis, which smooths through quarterly volatility, economic growth in the US and New Zealand is expected to run at about the same rate this year — 2.8 per cent. Beyond that, New Zealand’s forecast is sunnier.
The unemployment rate is similar, if you adjust for the much higher proportion of Americans of working age who are too discouraged to look for work.
Real wage growth is higher here, in that at least there is some.
Inflation in New Zealand is lower and so are wholesale interest rates (which is helpful for the exchange rate).
Our government accounts are in way better shape.
So the idea that we should be grateful to the Republicans for revving up the world’s largest economy, while it is only natural that New Zealand businesses are at their most despondent about the economic outlook since the recession, is just silly.
When the stimulatory impulse from those [US] tax cuts fades, as it must, and the sugar rush wears off, what is left is the debt that financed it.