Abacus: Economic Reflections At The Halfway Point
After the remnants of the 2008 Financial Crisis, there has been an unshakeable sense of paranoia about the overall performance of the economy. Fears of more schemes, reckless consumerism and late realizations are nightmares for many Americans who have seen and experienced the damage done during the Great Recession. Nothing could be more encouraging than to have your president tweet, “best economy and jobs EVER;” but the question of validity arises. There have been past moments of economic euphoria that turned to dust in the matter of days; could every aspect of the economy be doing well? Is it sustainable? Who is benefitting and how much? Where are the trade-offs? Grab your old economics textbook, words are about to get technical.
Key economic indicators show that the economy is performing well. Firstly, the gross domestic product growth rate is expected to continue bouncing between 2 to 3 percent for the next two years, rising to 2.8 percent this year, 2.4 percent in 2019, and 2.0 percent in 2020. This is considered to be a healthy range as anything below means the economy is slow and near stagnation, whereas anything far above denotes an overheating, unsustainable economy. The International Monetary Fund (IMF) forecasted 2.9 percent growth in April, while the Congressional Budget Office (CBO), a non-partisan entity, predicted 3.3 percent. This, however, is not necessarily predicted to be symptoms of long-run growth.
Unemployment has been at an 18-year low of 3.9 percent (or 6.3 million people), well below the Federal Reserve’s 6.7 percent target, supporting hopes of a well-functioning, productive economy. However, it is vital to consider that the broad unemployment rate is hardly an all-encompassing figure; it can cover the fact that a lot of the employed population is in part-time work, when the goal and requirement for sustenance is full-time employment. This involuntary part-time employed population came up to 4.6 million in July. Furthermore, the Bureau for Labor Statistics (BLS) monthly data shows that the long-term unemployed figure which accounts for almost 23 percent of unemployment, is basically unchanged, at 1.4 million, showing that more work needs to be done to increase labor force participation. All of that said, 3.9 percent is a huge improvement that should not be overlooked. The BLS predicts that the labor force will recover from the recession’s consequences by 2020, with jobs growing the most in healthcare, education, and hospitality.
Productivity measures look stronger than the general economic growth rate, with production from manufacturing set to grow at 2.8 percent this year, slowing down to 2.6 percent in 2019, and 2 percent in 2020. Manufacturing jobs grew by 37,000 in July, signaling growth in productivity and high confidence levels for manufacturers.
Inflation is predicted to be at a comfortable 2.0 percent this year and 2.1 percent in 2019 and 2020. The core inflation rate, which discludes food and energy prices to reduce volatility, mirrors this figure. The Fed prefers an inflation rate around 2%, to maintain steady prices and wages. As a result, the interest rate is allowed to move in accordance with a healthy economy. Post-2008, fed fund rates were at a low 0.25 percent, which effectively is zero. However, the rate has been increased over time, reaching 2.0 percent in June. The Fed has left this rate as is since their meeting on August 1, 2018, allowing accommodative rates of 1.75 percent to 2 percent.
Part of this economic stability can be pinned on the Trump administration's tax cuts. The cuts have been highly disputed amongst economists and analysts alike, some claiming that the effects have not benefited workers’ wages as yet. Tax cuts with effective budgeting can be used to bump up wages, which have been stagnant for many years. Additionally, these cuts can allow for business investment in capital, which should lead to increases in wages. Perhaps one of the biggest effects of the cuts has been on unemployment; businesses can employ more workers as a result of having more money on hand.
One major concern, however, is that a tax cut in a time of economic well-being has menial effects compared to in a time of economic downturn. This is a concern because tax cuts are made to stimulate an economy, which can put a burden on accumulated fiscal debts. The goal for stimulatory endeavors such as tax cuts is to make them pay for themselves. It is important to keep an eye on whether Trump’s tax cuts do in fact have the long-term improvements that were advertised, particularly on workers’ wages and not just businesses’ bottom lines.
One of the blaring concerns that sets off some uncertainty in the economic outlook is that of trade. With the ongoing trade war against other economies and mainly China, sectors of the U.S. economy are due for minor restructuring. With tariffs on imports, manufacturers and firms will most likely face supply-side shifts as they must consider taking on more expensive goods or sourcing from within the U.S.; this may result in higher costs to consumers, should companies decide to put the burden of the costs on them. Furthermore, such protectionist policies tend to leave much desired in an economy; the most obvious concern of protectionism is the effect it has on competitivity. Manufacturers and other sectors of the U.S. economy can take advantage of these tariffs and choose not to improve on their goods and services, thus leaving consumers with fewer choices of quality goods. However, all things considered, it is possible that the current trade war is a way to reset the world’s current trade system which according to a few officials, including President Trump, has been flawed for far too long.
Overall, the economy is functioning relatively well. The greatest fear at this point is that this economic growth is not long-term, as trickle-down policies tend to have little impact on bolstering economic growth. As a part of ongoing evaluation, it is important to keep an eye on wage growth. It seems as though the Fed is mindful of healthy inflation and unemployment rates. However, keeping the rate at 2 percent with possibilities of increasing it signals that the Fed is also aware of possible inflationary bursts. The push to keep the economy sustainable shows just how wary policy makers are of the Great Recession. President Trump has complained that the Fed’s rates have downplayed the success of tariffs set in the trade war and tax cuts distributed across businesses. Nonetheless, while things are starting to feel comfortable again, perhaps a little precaution does not hurt.