This is A Goldilocks Economy!

Financial fAQs

Economists have debated just what ideal economic growth should be, but the Federal Reserve does it for us. The Fed defines ideal growth as when we are at full employment with moderate inflation, inflation that says an economy isn’t overheating (Goldilocks’ porridge is too hot), or the economy is below its growth potential (it’s too cold).

Could we already be at that ideal of an economy that’s not growing too fast, or wants for jobs to be filled? We are at a 4.4 percent unemployment rate, the low of this 8-year growth cycle, and there are 5.7 million unfilled jobs in April, according to the Labor Department’s JOLTS report.

Maybe we should forget about that magical 3 percent GDP growth goal the Trump administration says we can reach with their proposed tax and regulation cuts. Our population isn’t growing as fast as during the baby boom and labor productivity is stuck in the 1 percent range, in part because businesses aren’t investing in new plants and equipment.

Graph: Econoday

But why should corporations invest more with weak Q1 2017 growth at 1.2 percent? Though second Quarter GDP growth may be picking up, which always seems to happen at this time of year. Consumer confidence is holding steady at an unusually strong level, 117.9 in May for the sixth straight reading over 110 and following a revised 119.4 in April and 124.9 in March which were the two best months of the expansion, reports the Conference Board.

So it’s been consumers that have held up this 8-year growth cycle, rather than corporations, which haven’t invested their record profits in expanded production; though profits are up 12 percent this quarter, after another record 22 percent surge in fourth quarter 2016.\

And consumer spending is showing signs of more life as well in April, as the consumer benefited from strong wage gains, kept money in the bank, and was an active shopper at least compared to the first quarter. If both confidence and spending continue to increase at these rates, then a 3 percent growth rate could be achievable for Q2. But that can only be short term without either higher productivity or population growth.

The key positive in the May report is jobs-hard-to-get which is a closely watched current assessment of the labor market. This reading pf the PCE index is down a very sizable 1.2 percentage points to a very low 18.2 percent for a new expansion best, reports Econoday. But inflation is still subpar with the core PCE inflation rate (without gas and food) rising just 1.5 percent.

This is not a good sign for future growth, as we need 3 to 4 percent inflation in an economy growing faster—such as maybe 3 percent, which the Trump administration is predicting for GDP growth this year. It’s really what are called core capital goods—investments in plant and equipment—that will determine future growth, and businesses haven’t yet begun to spend that kind of money with their record profits.

We wonder if businesses are waiting for those promised tax and regulation cuts? The Trump administration can’t accomplish much with executive orders, so Congress has to find a way to compromise. The health care deadlock should tell them that they need Democrats to bring that about, since Republican moderates and extremists can’t agree among themselves.

So maybe we should be happy that we are in the eighth year of this growth cycle, even with 2 percent growth.  We have in fact achieved a goldilocks, steady growth economy .

Harlan Green © 2017

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