Why isn't the economy being driven into a recession?

Or, what I really wanted to title this post: Why isn't the collapse of the housing market and an inverted yield curve driving the economy into a recession?

Last week's GDP growth of 4% was certainly a shocker. With the housing market suffering some serious weakness, the U.S. fixed income market trading like a complete mess and the yield curve being inverted (short-term rates higher than long-term rates) for more than a year, conventional wisdom would tell us that the US economy should be very close to a recession. However, GDP data is telling us quite the opposite.

With roughly 70% of the U.S. GDP derived from the consumer, the withdrawal of credit from the primary and secondary mortgage markets led many pundits to conclude the consumer is tapped out and therefore the U.S. economy is in for some serious trouble.

However, these proclamations of consumer collapse have failed to materialize. Why is that? The answer is a tight labor market, with wage increases more than offsetting weakness in the mortgage market. Three cheers for labor.

After twenty-five years of open markets, U.S. labor is now very competitive as lower-skilled jobs have moved offshore and jobs requiring higher-end skills have boomed. Most of the leading job creators, NASDAQ companies like Microsoft Corporation (NASDAQ: MSFT), Oracle Corporation (NASDAQ: ORCL) and Cisco Systems (NASDAQ: CSCO), were either just getting started or did not exist when this job growth boom began. Now there are hundreds, if not thousands, of companies that are seeking higher skilled employees.

At the end of the day, last week's GDP data demonstrates that good times are ahead for U.S. labor. After going through a brutal transition from a manufacturing to a service economy, labor appears it has the upper hand once again. The terribly weak mortgage market will be more than offset by the positive effects of a tight market for labor.