Essential Economics

— Mark Frears

Time

The beginning of a new year usually carries an upbeat message with a time of renewal and/or a new start. As you are contemplating your New Year’s resolutions, keep one thing in mind. You, I and Elon Musk only have 24 hours in a day. Period. It might be a good time to do an audit of how you spend your time, just like you need to track your spending when establishing a budget. Once you take out the big items of work and sleep (pay attention to this one), you only have a limited amount of time remaining. How will you spend it in order to meet your goals?!

How can we measure our efficiency in economic terms?

Output

The metric used in economic efficiency for output is usually Gross Domestic Product (GDP). As you can see below, we have been running above the long-term FOMC target of 2% for nine quarters, with only one exception at 1.6% in Q1 2024.

Source: Bloomberg

This is looking backward, but the forecast for Q4 2024 should continue the trend above 2%, as seen below in the Atlanta Fed forecast.

Source: Federal Reserve Bank of Atlanta

In addition, the December FOMC’s Summary of Economic Projections shows 2025 at 2.1%, 2026 at 2.0% and 2027 at 1.9%. The train rolls on. 

Input

While raw materials can be part of the cost of doing business, given the service economy we are currently experiencing, labor costs are the primary expense.

As you can see below, while wages spiked after the pandemic, they have been on a downward trend since. Although we are not yet in the range associated with the Fed’s 2% inflation target.

Source: Oxford Economics / Haver Analytics

So, if wage growth is slowing, how are we able to continue to put out strong GDP growth numbers? Bottom line, the worker is more productive. The chart below shows we are running above the business cycle average, coming at 2.2% in Q3 2024.

Source: Oxford Economics / Haver Analytics

Digging deeper 

Higher productivity has two sides, though. The employer loves this, as they can keep the same level, or improve, output with fewer workers. The efficient worker must show their value in order to be part of the workforce that could see better wages in the future.

Productivity is also good for inflation, as businesses can be more profitable, pay workers more and not have to raise prices.

Some of this improvement in efficiency has been driven by modifications that came out of the pandemic. While it was a tough time, there were some lessons learned. Hybrid or remote work saves employers overhead, and better means of insuring worker’s engagement have helped costs. Artificial intelligence, while still a wild card long-term, has shown its benefit to smaller businesses who are able to more with less.

Given low unemployment claims and historically low unemployment rate, the labor market still looks to be tight, or in need of workers. The shift to a more service-oriented economy needs workers with different skillsets.

If we can continue this current trend, we will keep this country booming, inflation at bay and workers employed in the best jobs for their gifts and talents.

Economic releases

Last week was kind of slow on the release front, with close out of 2024 and easing into 2025. Jobless claims were lower, and manufacturing is picking up. This week’s calendar is all mostly about the labor market. We have JOLTS, ADP and nonfarm payroll. In addition, we have consumer credit and consumer sentiment. The next FOMC meeting is January 28-29. See below for other releases.

This week’s calendar is all mostly about the labor market. We have JOLTS, ADP and nonfarm payroll. In addition, we have consumer credit and consumer sentiment. The next FOMC meeting is January 28-29. See below for other releases.