Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at [email protected]. His daily 70 word economics and policy blog can be seen at www.econ70.com.

Despite GDP again slowing in Q1, as has been the case for the past few years, the economic recovery that began in July 2009 remains intact. The poor performance of the US economy from January through March was almost expected, and the incoming employment, housing, and service sector data all point to a modest economic pickup. GDP growth the rest of the year should average 2.2%, with growth in Q2 closer to 2.75% as the economy rebounds from a tough Q1. The combination of continued wage growth and increased residential construction activity suggests that 2016 will probably improve as it progresses.

Despite weak energy prices, a continued strong dollar that has hurt manufacturing by making US exports costly and imports cheaper, and a struggling agricultural sector, the rest of the economy is OK. As long as the service sector and construction continue to expand and wages rise, the US economy will continue to grow despite the headwinds it faces. Importantly, the labor market continues to strengthen, voluntary quit rates are rising and are almost back to where they were before the Great Recession, the number of involuntary terminations keeps falling, and job creation, while down from last year, remains strong. At this rate, there will be little slack in the labor market 12 months from today. Lastly, passage of the FY 2016 budget package has boosted economic activity as it extended some tax breaks and eased spending caps on domestic and military spending, making fiscal policy pleasantly expansionary.

A definite economic bright spot in 2016 has been housing, and that is due to rising household formation. After averaging well over 1.2 million annually from 1983 through 2006, household formation plummeted to just 600,000 in 2014. Since then, it has been rising by about 1.2 million a year. Add to this slightly improved access to credit, and housing starts should reach an annualized average rate of 1.19 million during the second half of 2016, their best level since late 2007, with new single-family construction contributing at a pace of 810,000 units and multifamily adding 380,000. Despite being severely constrained by a lack of inventory, pending home sales are strengthening and existing home sales should rise by 3% annually, while home prices should rise by 5% annually.

As for inflation, it remains benign but shows signs of slowly rising from its current level. The dollar is likely to strengthen slightly in the latter part of the year and oil prices appear to be rising, thus the two trends that have exerted strong deflationary pressures on imports and energy respectively should dissipate. Moreover, as the unemployment rate continues falling, labor shortages are becoming increasingly widespread. This pushes up wage growth, which is definitely rising, albeit modestly, and thereby boosts household spending. However, rising prices and wages will push the Fed to raise short-term rates by one-quarter-of-one percent as early as July, and certainly by November or December. Long-term rates have bottomed and 10-yr Treasuries will end the year at close to 2% as the economy strengthens.

In short, the economy continues to grow modestly. Short-term interest rates are likely to start rising, wages are rising, and residential construction activity looks to continue to slowly strengthen as we go into 2017. Most critically, continued solid job creation will keep consumer spending up and the likelihood of a recession during the next six months, close to zero.

Congratulations to Lynn Greco, recent graduate of Delgado's Architectural/Design Construction Technology program, and a local student chapter member. Lynn was very active in HBA functions, and has received the Outstanding Student Awards from NAHB at the 2016 IBS in Las Vegas. 

Lynn, we are very proud of you, and wish you a very happy and successful career!

Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at [email protected]. His daily 70 word economics and policy blog can be seen at www.econ70.com.

All too frequently the argument is made that government assistance programs subsidize low wage employers. That is, firms like Wal-Mart, McDonalds and Target, to name just a few, are able to pay very low wages precisely because management knows that their low paid employees will qualify for Medicaid, food stamps (officially known as the Supplemental Nutritional Assistance Program) and other such public assistance. As a result, it's assumed that these public programs allow firms to pay lower wages than would be possible were these programs not to exist. To be blunt, this position is completely wrong.
Rather than subsidizing low-wage employers, public assistance programs generally reduce the supply of low-skilled workers who are willing to work for low pay and poor benefits. This is because in many cases, benefits are more generous when family incomes are very low or zero. As family income rises, benefits are frequently cut back or eliminated entirely. By reducing the pool of workers willing to take poorly paying jobs, Medicaid and most public assistance programs tend to increase, rather than decrease, wages at the bottom of the pay scale. Were these programs not to exist, the unemployed would be more eager to work than they currently are, and thus more willing to work at a lower wage.
Again, the availability of health insurance, food stamps, and other assistance when work is not a requirement means that paid employment is somewhat less attractive than would otherwise be the case. Moreover, the fact that in many cases benefits are reduced as earnings rise means that work is financially less rewarding to these households than it is to unsubsidized households. In short, programs that offer more generous payments to those with no earnings than to those with higher incomes reduces the supply of workers willing to work at very low pay. This is quite the opposite of a subsidy to low-wage paying firms.
Two programs that are exceptions to the above are the Earned Income tax Credit (EITC) and childcare subsidies targeted at working families with low incomes. Because benefits are only paid to families with a parent who is employed, these programs encourage work. By boosting the supply of low-wage labor, these programs increase labor supply and thus decrease wages. However, these programs are not really subsidies to low-wage employers. Rather, they are programs that offer inducements for low-wage workers to enter the job market and take jobs that do not offer adequate pay by making it financially advantageous to do so. The goal of the EITC is to improve the standard of living of low-income families and encourage work, without fear that as a result of a rise in earned income, public benefits will be lost. In this way the EITC makes work pay.
In conclusion, public assistance programs that offer benefits to non-working Americans reduce the incentive to work, thus boosting wages. Similarly, programs that dramatically reduce benefits as household income rises also boost wages by making work less attractive. There are no subsidies here. While programs that incentivize work, like the EITC, increase the supply of workers and thus decrease wages slightly, calling such programs employer subsidies is essentially mistaking the bathwater for the baby.