Last month’s employment report opened the way to optimism, but the March report swept it away. Job creations were very low, at 103,000, vs. an expected level of nearly 200,000, and new jobs in the first two months were revised down by 50,000 on average. Not only this, but wage increases are showing fewer and fewer signs of recovery. With the exception of finance, wage increases were down in most cases compared with last year or stationary at levels below the national average, which, as a result, is showing no sign of improvement. At 1.7% year-on-year in March, hourly wages in manufacturing increased at half their rate of mid-2016. The leisure and hotel sector, the nation’s third-largest employer segment with more than 10% of all positions, wages are now rising by less than 3% vs. 4.5% in the middle of last year. Although these results remain difficult to explain, they are certainly far removed from expectations, and neither the markets nor an administration tempted by protectionism can long ignore them.
Trends in the financial markets have accelerated in the last few days. After hesitating slightly at the start of 2018, it is increasingly obvious to investors that reflation is around the corner. That belief is based on widespread growth, a surging oil price, the first positive effects of Donald Trump’s tax reform – with giant US companies promising to repatriate profits – and good news on investment and jobs. It is hard to see how that situation could fail to end the phase of latent deflation in the last few years and support expectations – seen throughout 2017 – of inflation getting back to normal. The impact of rising oil prices alone could significantly change the inflation situation, judging by how sensitive inflation is to movements in oil prices. If crude stabilises at $70 per barrel between now and the summer, inflation could rise by more than half a point in the industrialised world, taking it well above the 2% target that it touched only briefly in February 2017.
So what could prevent a significant increase in interest rates? It is very tempting to change our outlook for 2018. How is the interest-rate environment likely to develop?
2018 has started on a confident note. After a very strong end to 2017, when global economic growth probably accelerated back over 4%, impressive indicators in early 2018 mean that there is no room for scepticism: growth looks like it is here to stay. There is plenty of evidence to support that view, including exceptionally loose monetary conditions at the global level, an upturn in business investment and international trade, a widespread decline in unemployment, and at least temporary support from the US tax reforms adopted late last year. To cap it all, wealth effects are increasingly visible, driven by exceptionally high valuations for financial and real-estate assets.