Sluggish Economic Growth, The Federal Reserve, And The 2016 Election
Earlier this week, the Commerce Department reported that the economy had grown at a rather anemic pace in the Second Quarter according to its latest Gross Domestic Product growth estimate:
The economic recovery may be durable, but it is anything but dynamic.
Weighed down by anemic business spending, overstocked factories and warehouses, and a surprisingly weak housing sector, the American economy barely improved this spring after its usual winter doldrums.
Consumer spending advanced at a robust pace, helping to sustain a modest growth rate of 1.2 percent, but the gain was overshadowed by the poor showing in other sectors of the economy. The April-June quarter was the third consecutive period in which the economy advanced at less than a 2 percent annual rate, the weakest stretch in four years.
The new economic data underscores the continuing frustration about the current growth cycle, which has now gone on for seven years — longer than most economic upswings — but which has repeatedly failed to break out into a higher orbit.
And with the political conventions now over, and the brawl between Hillary Clinton and Donald J. Trump for the White House in full swing, Friday’s data at least partly undercuts the Democrats’ argument that the nation’s economic health is improving.
“This definitely feeds into an existing Republican narrative that the economy is growing too slowly and dials it up a notch,” said Jared Bernstein, a liberal economist who served in the Obama administration.
The economic debate may intensify ahead of the election in November, particularly because the recovery’s gains have been less robust in battleground states like Ohio and Pennsylvania. States firmly in the Democratic or Republican column — California and Texas, for example — are generally doing much better.
On Friday, Republican leaders were quick to cite the new data on the nation’s gross domestic product to reinforce their argument that President Obama’s policies have failed to turn things around.
“After eight years of higher taxes, endless regulations and skyrocketing health care costs, the chickens are apparently coming home to roost,” said Senator Tom Cotton, Republican of Arkansas.
But there are other signs that the economy is on the mend, even for ordinary Americans who had, until recently, barely benefited from the rebound. The unemployment rate, which reached 10 percent after the recession, has fallen back to around 5 percent, while hiring and pay gains have been healthier lately. Those factors may ultimately contribute more to perceptions of vitality than abstract statistics on the nation’s economic output.
“What really matters to people is jobs and income, and that’s most recently been a positive story,” added Mr. Bernstein, who is now a senior fellow at the Center on Budget and Policy Priorities.
Based on more complete information about recent years, the government revised last year’s growth rate up slightly to 2.6 percent — the best so far since the severe downturn ended in mid-2009. But that is still below the gains the American economy recorded in the mid-2000s, let alone in the booming late 1990s.
Over all, the economy’s 1.2 percent advance in the second quarter, the Commerce Department reported Friday, was just slightly better than the 0.8 percent pace recorded in the first quarter.
Besides the decrease in inventory accumulation and business investment, weaker government outlays also held back growth, reinforcing a trend that has hobbled the recovery in recent years.
The abrupt falloff in homebuilding caught analysts off guard, but it came after a series of double-digit gains in late 2014 and 2015. And with mortgage rates very low and home prices still rising in many parts of the country, the residential real estate sector is expected to contribute to growth again in the coming quarters.
Household spending was the economy’s bright spot, rising at an annualized rate of 4.2 percent.
“The consumer is doing all the heavy lifting,” said Nariman Behravesh, chief economist at IHS Markit. “Aside from technology and software, business spending was bad and housing was also surprisingly weak, which is payback for gains in recent quarters.”
This report came at virtually the same time that The Wall Street Journal reported that corporate profits had risen during the same period of the year during which the economy seemingly stalled yet again. This opens the possibility that we could see stronger economic growth in the second half of the year as businesses invest those profits in replenishing inventory in preparation for the end of the year and, possibly, investment in the kind of business expansion that would fuel much stronger economic growth, something we haven’t really seen in the seven years of the recovery from the Great Recession. As has always been the case, businesses seem to be holding back on widespread expansion simply because the state of the economy, and the individual markets they serve, is so uncertain that it’s unclear that they’d be able to recoup their investment never mind make a profit. Additionally, businesses apparently continue to find that increases in worker productivity mean that expansion isn’t necessarily needed in order to meet whatever increased demand may be out there. This last point is one of the reasons why job growth has been less than spectacular throughout the recovery. As long as that’s the case, we’re likely to continue with the middling growth that we’ve seen throughout this recovery, a scenario that risks the possibility that even a slight economic shock from some unforeseen event could throw the economy into recession at a moments notice.
Oddly enough, the report from the Commerce Department came on the same day that Federal Reserve Board Chair Janet Yellin said in a speech that economic growth was becoming strong enough to justify interest rate hikes at some point in the near future:
GRAND TETON NATIONAL PARK, Wyo. — Janet L. Yellen, theFederal Reserve chairwoman, said on Friday that she saw a stronger case for raising the Fed’s benchmark interest rate, suggesting the central bank was likely to act in the coming months.
“In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months,” Ms. Yellen said.
The remarks, delivered at an annual policy conference here, indicated that the Fed would consider raising rates at its next meeting in mid-September, though most analysts say they think the central bank is more likely to move in December.
In trading on Friday, the chances of a September increase rose to 36 percent from 21 percent, according to a measure derived from asset prices. The chances of a rate increase by the end of the year rose to 61 percent from 52 percent.
Stanley Fischer, the Fed’s vice chairman, who has suggested in recent months that the economy is strong enough to move, told the cable business network CNBC that a strong August employment report, due Sept. 2, “would probably weigh in our decision.”
But some officials remain nervous about the fragility of this long but tepid period of economic growth.
The Fed also may be inclined to wait until after the presidential election in November, like earlier this year, when Fed officials said they did not want to raise rates before Britain’s referendum on European Union membership in June.
Ms. Yellen’s speech “leaves the Fed in a stance of watchful waiting, which is exactly where it was at the end of the last F.O.M.C. meeting in July,” Kevin Logan, chief United States economist at HSBC, wrote in an analysis. “Policy makers are leaning toward a rate hike, but feel that they can wait until they are more confident that the expansion will continue at a sustainable pace.”
Ms. Yellen’s remarks appeared aimed in part at jarring the complacency of investors who had concluded that the Fed would not raise rates in September. Fed officials have repeatedly warned that markets had too much confidence in the likely path of policy, given the central bank’s considerable uncertainty about its own plans.
Ms. Yellen underscored the point with a chart showing that Fed officials thought rates could plausibly end 2017 anywhere from nearly zero to 4 percent.
Yet she also stopped short of echoing other Fed officials who have suggested in recent weeks that they are inclined to raise rates in September. The Fed’s policy-making committee is scheduled to meet Sept. 20 and 21 in Washington.
The debate over raising rates has been going on both inside the Federal Reserve and outside of it for the better part of a year now. At this point last year, it appeared as though the Board of Governors was on the verge of approving a rate increase in its September 2015 meeting only to see the board hold back on an increase in the wake of weaker than expected economic news from the United States and Europe and the continued impact of the market chaos that had started in China and spread around the world over the previous summer. Ultimately, though, the Fed ended up raising rates in December of last year by the smallest of measures and suggesting that it was likely that they would be doing so again in the coming year on a quarterly basis. As it has turned out, the Fed has found reasons, justified by weak economic growth and less than spectacular job growth among other things, to forego any such increase. Given that, one suspects that there will not be an increase in September absent clear evidence of a fast turnaround. This prediction is supported by the fact that, in the past, the Fed has been reluctant to do anything that might constituting rocking the economic boat before a national election. Given that, I suspect we won’t see a rate increase until the December meeting yet again. Even in that case, though, absent real evidence of the kind of booming economy that could lead to inflation, which there’s absolutely no sign of right now, one wonders why raising rates, which has the potential to slow down an already weak economic recovery, would be either necessary or wise.
Finally, of course, the state of the economy continues to be an issue in the election itself, or at least you think that it would be if the Republican candidate for President would actually bring it up. This past week, for example, Trump spent the week attacking Hillary Clinton as a bigot and changing his position on immigration at least twice in a twenty-four hour period. The anemic economic news? Totally unmentioned, and it’s been that way throughout the campaign in the wake of other bad reports such as some of the recent unemployment reports. In a normal campaign, a candidate seeking to challenge the nominee of the incumbent would jump on news showing a weak economy, but the Trump campaign is not operating like a normal campaign in any sense of the word. In any case, it’s likely that the state of the economy as we get closer to November is likely to have an impact on the election and the attitude that voters will take with them to the polling place. Who that ends up benefiting is another question entirely.
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