Withering social capital
13 March 2018
For an economy supposedly at close to full employment, the US is adding a surprising number of jobs. February's employment report revealed a bumper month for hiring; with non-farm payrolls increasing 313k in the month after an upwardly revised 239k in January (see Chart 2). And though the unemployment rate did not fall, the stability is explained by the 0.3 percentage point (ppt) rise in the participation rate. On current trends, the unemployment rate will push well below 4% over the coming months. Nevertheless, wage growth remains very benign. As we anticipated, average hourly earnings grew only weakly in February, in payback for the strong weather distorted January outturn. Labour cost growth is still trending up, but gently rather than aggressively. Unsurprisingly, investors liked the Goldilocks nature of the report, pushing up equity prices and steepening the yield curve on the day. To our mind, however, it strengthens the case for the Federal Reserve (Fed) to lift policy rates four times this year, keeping in mind that the stimulatory impacts of tax cuts and government spending increases are still to be felt.
There is little doubt that the strong economy and financial markets are translating into buoyant consumer confidence, but are they also boosting people's broader sense of well-being? As outlined in the Global Overview, the most comprehensive and globally comparable indicator is compiled by Gallup, which each year asks a demographically weighted sample people from each country to evaluate the quality of their current lives on a scale of 0 to 10, with 10 being the highest. The results are then published in the World Happiness Report (WHR). Last year's report, which incorporated information collected between 2014 and 2016, presented a mixed picture on the state of American well-being. On the positive side, the US ranked 14th for overall 'happiness' out of 155 countries, with strong contributions from its high living standards (the US is the 10th ranked country in terms of GDP per capita) and the generosity of its population (ranked 22nd), using a measure related to the incidence of its charitable giving. On the other hand, the US ranked quite poorly for such a rich country on the extent of social support (39th), healthy life expectancy (34th) freedom to make life choices (43rd) and perceptions of corruption (48th).
Moreover, although there is a modest positive relationship between changes in per capita income and changes in happiness over time, the US is one place where the average person appears to have become less satisfied with the quality of their lives over the past decade even as aggregate living standards have increased. Last year it ranked a dismal 103rd in terms of the change in its average level of 'happiness' over the past decade or so, with only Greece, Italy, Spain, Denmark and Japan doing worse among the world's rich countries (see Chart 3). A sceptic might respond that it is better to focus on more traditional and less subjective measures of well-being, like unemployment and per capita incomes. But as the most recent WHR pointed out, this decline in average self-evaluated quality of life has been close associated with falling trust in government and health outcomes, as well as a rising sense that government and business is becoming more corrupt. Little wonder that political populism is on the rise and that the average voter is looking for alternatives to the status quo.