Is a real recovery finally here? That’s what the latest U.S. employment data appears to be telling us. Not only did payrolls come in dramatically higher than expected, workers finally got a bit more money in their pockets–wage growth, which had been hovering a little above 2 %, kicked up to 2.5%—a 6 year high. That’s modest by historical standards, particularly at this stage of a recovery. But it’s a shift in the right direction for the continued strength of an economy made up of 70% consumer spending.
It’s always dangerous to extrapolate any economic trend based on a single month of good data. But there’s reason to think that the global economy may soon surprise on the upside. Here’s why:
The Chinese economy appears to be stabilizing. The hundreds of billions of dollars worth of policy stimulus the Communist Party kicked in over the summer finally seems to be working; fourth quarter growth is picking up. Of course, China still has a big leap to make to shifting its economic model longer term, but having discussed this topic recently with a key US economic player in the know, I’m a little more bullish on that process than I had been.
For example, in some ways, the bad news this week about China throwing off 17% more carbon emissions than previously thought could been seen as an increase in political transparency (the Party never likes to publicize bad news) which is an important part of that process. Ditto the meeting between Xi Jinping and the leader of Taiwan.
Lower commodities prices are kicking in–while they hurt countries like Brazil, Nigeria, and many parts of the Middle East, they are good for China, the U.S. and Europe–on balance, that’s a net positive for the global economy.
Financial markets are calmer, as investors have priced in the effects of a likely Fed rate hike, which Yellen is now indicating could come by end of year, and the divergence in monetary policy in places like Japan and Europe, which are still doing quantitative easing and keeping rates low (the effects of fiscal austerity have diminished in Europe, which is another economic tailwind). That expected divergence had created volatility in global markets over the last few months, but now, it could help buffer markets that might have been hit harder had every major region been hiking rates at once, as was usually the case in the past.
The big remaining question—with manufacturing still weak in the US, how much can wages growth? The next two months of data will be key—if wages keep rising even without a hike in manufacturing jobs, we’ll know something important, new, and positive is really happening in the US economy.