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NFIB Warning and Improving Conditions - October 9, 2018

NFIB Sends a Warning

The good news is that the NFIB’s Small Business Optimism Index “continued its historic 23-month positive trend”. According to NFIB President Juanita Duggan, “Our members say that business is booming and prospects continue to look bright.” This assessment was vindicated by Compensation Increases, which set a record, and Capital Spending, where “sixty percent of owners reported capital outlays”. However, for those who have watched bonds and equities falter recently, the NFIB offers a warning in the comment section. As opposed to the Fed’s rosy outlook, which we covered last week, the NFIB cautions that barring some breakthrough, goldilocks conditions of high growth, low unemployment, and low inflation are coming to an end.

“The economy is growing faster than our ability to support that growth without inflation or significant productivity gains. Many analysts observe that with the labor force growing about 0.7 percent a year and output per worker (productivity) growing about 1.5 percent per year (at best), it is hard to support demand growth in excess of about 2 percent... So, with growth running at 3 percent and higher, this presents issues in the future. A good example of this is the impact of the shortage of labor on our ability to grow and produce more stuff. Of course, there are changes that can neutralize some of these problems including higher labor force participation rate induced by higher compensation, labor saving technology, new scientific breakthroughs, and the like. Hopefully policymakers won’t screw around with success.”

More Good News for less than High School

While the NFIB’s warning could be bad news for the overall economy, there may be a silver lining, particularly for workers with less than a high school diploma. With a participation rate below 50% and an unemployment rate more than double that of workers with a bachelor’s degree, workers with less than a high school diploma are ripe for hiring and could be the beneficiaries of the “higher compensation” that the NFIB alludes to. However, this is just icing on the cake for this group, which has already seen remarkable improvements in their employment situation. Since Trump’s election, workers with less than a high school diploma have seen median weekly earnings rise more than 6%, unemployment drop by more than 2%, all while labor force participation has increased by more than 1%. This may go some of the way to explain why Trump’s approval rating is particularly high among nongraduates and will be something to watch heading into midterm elections.