There are good news coming out of the US economy.
The US job market is running hot.
The unemployment rate is shrinking. It is currently down to 3.9% from around 10% since 2008.
The recent JOLTS report from the US Bureau of Labour Statistics showed that US companies are advertising jobs at record levels. Job openings have reached a new high of 6.9 million.
Also, more Americans are quitting their jobs.
As reported by APNews:
‘U.S. employers advertised the most jobs on record in July, and the number of workers quitting their jobs also hit a new all-time high.
‘Americans are increasingly taking advantage of a tight labor market to find new, often higher-paying jobs. That could help push up wages broadly across the economy.’
Businesses are struggling to find workers, which means that hourly wages could start rising quick.
Consumers are confident about the future. Small business owners are also optimistic. In fact, this is the most optimistic they have been since 1983, according to the NFIB Small Business Optimism Index.
Yet while things are looking good, there is cause for concern
To solve the 2008 crisis, central banks injected a lot of cash in the system. The result is that the Bank of Japan, the Federal Reserve and the European Central Bank have massively increased their balance sheets since 2008, as you can see in the graph below.
They also lowered interest rates to record lows to boost the economy.
Yet a decade of low interest rates has encouraged debt taking…and rising asset prices.
In the last decade, global debt has reached a new record high of US$247 trillion, or 318% of GDP. Back in 2008, global debt was just US$177 trillion.
Many G20 countries are now running current account deficits, as you can see in the graph below. A current account deficit is when the value of imported goods, services and investment incomes are greater than the value of those exports. In other words, when a country spends more than what it brings in.
Source: Brookings Institution
All this debt has become a driver of global growth.
Yet it comes at a price.
For one, the problem is that most of these countries have an ageing population. Which begs the question, where will future growth be coming from?
Interest rate rises will make global debt repayments harder
The other issue is that interest rates have been low for so long that households are now severely overleveraged. A small rise in interest rates could have a massive impact on their finances.
And, in recent years, the US Federal Reserve has been raising interest rates and unwinding their balance sheets to normalize the economy. Currently, they are looking at two more rate hikes this year and three next year…
…but they may need to tighten faster.
Reuters recently interviewed the Boston Federal Reserve Bank President Eric Rosengren. Here is what they reported:
‘…Rosengren has joined colleagues in beginning to lay the groundwork for those rate hikes to potentially continue longer and to a higher level than currently expected as the outlook for the economy strengthens.
‘Rates may not only need to become “restrictive,” but the definition of that may be moving up as well, Rosengren said in an interview with Reuters on Saturday following an economic conference here….
‘“This is not hair on fire. There is upward pressure on inflation, and given that we are already at 2 percent, labor markets are already tight … that is going to be a situation where we start persistently having inflation above what our target is,” Rosengren said. “There is an argument to normalize policy and probably be mildly restrictive.”
‘…Between growth hovering around 3 percent, roughly full employment, and risks that global trade tensions could “embed” faster price hikes, Rosengren said “we have a pretty good idea what the path will be if we don’t have a big surprise.”’
That is, the Fed may already be looking already at increasing rates quicker than expected.
The thing is that with the labor market tightening salary growth is picking up.
If inflation climbs higher the Fed may need to raise interest rates faster than expected to counteract the effects of inflation.
Higher interest rates would make all that debt more expensive…which could lead to credit defaults in the US and around the world.
If things continue to heat up and inflation picks up, all that good employment news could turn into bad news for a highly leveraged world.
Editor, Markets & Money