William D. Johnston


Economic Commentary

I enjoy the interaction that I get with readers of our Greenleaf Trust newsletter each month. The reactions are usually positive and occasionally challenging, especially when we approach the silly season of political campaigns. I changed the title of my monthly article a few years ago from “Economic Update” to “Economic Commentary” because I felt commentary was more accurate. My articles usually involve economic data and, as you have observed, almost always involve opinion and commentary surrounding the data points articulated. Last month’s topic of the impeachment process seems to have landed squarely in the commentary category given the number of responses received.

Interestingly, those who responded to the article seemed to reflect exactly the current polarization afflicting our country. Half of those who engaged with me felt I was a Republican making excuses for immoral, unethical and illegal activities of the President, while the other half expressed belief that I was endorsing the political process of impeachment, and therefore, the Democrats’ push for impeaching the President. I either hit the right or balanced chord with my article as witnessed by the equally polar opposite reaction, or the reaction is yet additional evidence of the political divide that exists. For me, the reaction is reinforcement that how we view any public policy decision or economic result will be determined by what party is in office and generally not by the quality of the decision nor the direction of the data. If it is our party and our candidate, we will make excuses for supporting the policies and results, and if it is not our party and candidate then we do not need fact to support our discontent. In any case, there will be more opportunity for the exchange of ideas, and it is an exchange I enjoy. Speaking of ideas and data, let us examine some.

Federal Reserve

For the third time this year, Fed Chairman Powell announced the lowering of federal funds rate. The rate cut was expected and had been telegraphed by various Fed governors during the weeks leading to the FOMC meeting. As always, it is not the action that is most important, but the verbiage and the nuance of that verbiage in the announcement itself as well as the notes that accompany each FOMC meeting. Powell clearly suggested that the Fed did not expect any further rate cuts this year and spent a good deal of time speaking of employment slack and its relationship to inflation as well as the Fed’s inflation target of 2%.

Specifically Powell said, “Since monetary policy operates with a lag, the full effects of these adjustments on economic growth, the job market and inflation will be realized over time.” Further, he stated, “We see the current stance of monetary policy as likely to remain appropriate as long as information about the economy remains broadly consistent with our outlook of moderate economic growth, a strong labor market and inflation near our symmetric 2% target.”

Market analysts left feeling that the Fed was comfortable with where we are with respect to the Fed Funds Rate, yet will continue to monitor the data for further directional change.


Every recovery cycle enjoys consistent trends in employment. In every post-recession environment, job growth is gained first by the highest educated and technically skilled workforce, commonly referred to as U-3 employment data. This job growth is regional at first and often reflects very low wage growth. As employment grows, the supply of labor diminishes and wage growth begins a slow but steady accent. Initially, monthly job gains need to be robust in order to move the rate of unemployment down. In the deepest part of our 2008 recession with U-3 unemployment in excess of 10%, monthly job gains of 250,000 were necessary to keep the employment rate steady. At today’s 3.6% unemployment rate, we need add only 100,000 jobs to stabilize employment. This month’s announcement of job gains of 133,000 were certainly enough to hold the unemployment rate at 3.6% and improve the labor participation rate by .001%, which implies a precision that probably doesn’t exist. Most notable in the data was the continued improvement in U-6 employment. You will recall that U-6 employment comprises those first fired and last hired and are in a pool of labor in larger supply. The lag between an improving economy and U-6 employment is significant and is especially true for wage rate growth among that sector of employed. The most recent data reveals U-6 unemployment at 6.3%, a reduction of twelve points from the high experienced in 2008 at 18.6% and well below the last twenty-year average of 10.4%.

As you might expect, wage rate growth among the lowest wage earners has also begun to advance, as has the transfer of people from minimum wage to higher wage rate employment. This data is certainly great for those who suffer the longest duration of unemployment and lowest wage rates during recovery cycles. The data also reflects a further inflection point in labor supply. U-3 employment categories have experienced consistent wage growth for 2018 and 2019. That wage growth has now found its way to U-6 employment. We are adding jobs at a monthly rate consistent with the number needed to stabilize the current unemployment rate and labor participation rates have been incrementally increasing especially between the ages of 23 – 54, a category that has lagged for several years. For those who see the glass half full, this data is welcome and amplifies the notion that the economy is strong. For those who might have their glass half empty, this data cannot be sustained for much longer and they feel that it is further evidence that the economic cycle of expansion is near its end.

From the Fed’s point of view, it is evidence that the current monetary policy is appropriate. Employment is full, wage growth is occurring and inflation is benign though positive.


The current inflation rate is 1.7%, slightly below the Fed target rate of 2%. Yes that is correct the Fed actually wants some inflation of prices to assure economic activity remains positive. Deflation of prices is not good for economic expansion, as it does not reward capital investment, and therefore growth of production of goods and services. The thing that concerns most economic analysts is the lack of inflation given the length of our economic expansion and historically low unemployment rate. Further troubling is the lack of business capital investment necessary to improve productivity, and therefore sustain GDP growth.


Real GDP (adjusted for inflation) rose at an annual rate of 1.9%, which the Fed now characterizes as moderate and the President characterizes as the best economy ever. As a reminder, the opposition party during the last administration labeled 2% GDP growth as weak.

In Balance

The consumer is employed and receiving wage increases. Consumers are leading the charge and are confident. Manufacturing remains in recession territory and business capital investment is weak, offset by government spending and expanding deficits.