How is the Economy Doing? It Depends on Which One
by Chris Kuehl, managing director
Armada Corporate Intelligence
The most common query received by an economist is How is the economy doing? This generally sends me into a flurry of qualifiers and a certain amount of dissembling. There really is no adequate answer to such a question, as there always will be parts of the country that are booming and others that are wallowing in recession. There are industries that are thriving and those that are in a decline, which may not have much to do with the economic conditions of the moment. Lately, an even bigger divergence has been seen, as far as the economy is concerned, and it is not all that easy to explain. Either the optimists are deluding themselves and seeing things that may not exist, or the pessimists are overreacting and expecting disaster when there is little evidence of it.
As is often the case, reality may lie somewhere between the two. For the last nine years, the US economy has been more or less in recovery mode, with steady and unfortunately anemic growth. Normal conditions these days seem to be a growth rate of between 1.5 percent and 2.5 percent. It has been rare to be either under or over that rate. The puzzling part of the economic assessment is that some evidence would seem to point to a much more robust economy, while other evidence points to one that is starting to slow down considerably.
One factor that is consistently overlooked is the impact of government stimulus. In almost every other recession or downturn, the response from government has been similar. This response includes both big spending hikes and tax cuts, as the aim is to bolster the economy with a nice little shot in the arm. This time, there was one rather anemic and ultimately misguided attempt an $800 billion spending effort in 2009. It was thought that states would spend that largesse quickly remember those shovel-ready projects? The states didnt do their parts at all and instead used the federal money to avoid making big budget cuts and that allowed them to delay their response by a year. The cash was not stimulative, and the economy has been trying to get itself in gear with the low interest rates and other policies of the Federal Reserve an institution that is not designed to be the sole support for stimulation.
The markets have been on a tear for well more than a year, hitting new records every week. The investment analysts keep staring at this like one looks at a balloon that is getting way too much helium. They just know this is going to burst, but it has been on the edge of that correction for months and just keeps on rising. Nobody wants to get off this ride too soon, as leaving money on the table is as bad as losing it by staying in too long.
There are many reasons suggested for this enthusiasm. For instance, a record level of foreign investment is occurring as the markets in Europe and Asia have been so weak that these investors have been seeking better opportunities in the US. There is the usual frenzy that accompanies a growing market, and thus far the collapse is only an existential threat. Then there is the fact that many of the decisions being taken by the Fed and others are feeding the enthusiasm namely, the Fed sees no reason to truly clamp down on the access to easy money provided by low interest rates. If one simply looks at the markets, the assumption would be that breakout growth is just around the corner.
The overall economic data of late is not telling such an optimistic story. We see that retail sales have been down for the last two months, and it is evident that consumers are returning to their cautious ways. This is partially motivated by the fact that wage growth has not taken place, despite the lower levels of unemployment. There also are growing concerns as far as economic policy change is concerned, as consumers are no longer expecting any of the reforms suggested at the start of the year to take place. The gridlock in Congress is worse than ever, and confidence levels have remained low 44 percent express no confidence in the legislative branch. This is as confident as people have been in five years in 2016, lack of confidence was at 52 percent. Confidence in the presidency has fallen to levels not seen since 2008, as 42 percent of those polled indicate very little confidence, as opposed to readings in the 30s through most of the last decade. When half the consumers are less than confident, that is not good news as far as renewed vigor in the economy.
The job numbers have been decent but without the corresponding boost in wages. The indices, as far as manufacturing are concerned, have been strong but not quite as strong as they had been earlier in the year. Exports are doing better as the dollar has weakened somewhat, and the economies of Europe and China have been improving. Inflation has been very tame, and that has been a little puzzling, given the low rate of joblessness. The lack of overall wage hikes has been a factor and so has the low price of commodities such as oil and industrial metals. All of this adds up to a disconnect with growth twinned with decline. The question now is whether the stock market can pull the rest of the economy or if the economy as a whole starts to weigh on the investors.
The US economy will be dependent on three developments as far as further growth is concerned, and only one of these is really under the control of the US. The US remains an export-oriented country one whose GDP is 14 percent dependent on exports. If the rest of the world is not in recovery, the US will not be able to gain much traction. The second factor is inflation. The US could use just a bit more, as this would allow some hike in producer prices and, therefore, wages. That has not happened thus far, due to the consistent decline in the price of many industrial commodities, such as oil and metals.
The last motivator is more a matter of mood. The US is driven by consumers they account for some 70 percent of the GDP and almost 80 percent of jobs. The consumer was in a great mood at the start of the year, but that has faded as people are less and less convinced that the big changes will be taking place. If there is a shot in the arm for the consumer, the economy would respond, but at this point it is hard to determine what that would be.