A Booming Economy: A Word of Caution
Have no doubts about it, our economy is booming, but its success may also be its downfall.
The United States economy seems to be in a period of prosperity. Our economy is booming, but there may be problems around the corner The United States Economy is expanding too fast for its own good. This is because the economy is at full employment, inflation is starting to rise, gross domestic product is growing at an alarming rate, and investors have been bullish for too long and are starting to worry about the impending consequences. The Trump administration has pushed the economy too far by introducing extremely aggressive tax strategies. It is only a matter of time before Washington’s greed catches up to them and we enter another economic downturn. It is of utmost importance that we pay attention to these issues at hand. We have to write to our congressmen, get out to vote, and overall, make sure the economic future of our country is in good hands.
The U.S. economy is at or beyond full employment and continuing to grow. According to the U.S. Bureau of Labor Statistics, the current unemployment rate is at 3.9 percent. While some experts argue exactly where full employment lies in this economy, most agree that it is somewhere between 4 percent and 4.5 percent. In August, 201,000 non-farm jobs were added to payrolls around the country. This not only means that the labor force is growing, but people who were not in the work force are re-entering in droves. Discouraged workers are re-entering the labor force due to high expectations for the economy. These high expectations encourage people to re-enter the labor force due to belief that a job will be profitable to them and they will not lose that job. This shows that expectations for the future are high and it is encouraging discouraged workers to find jobs. This historically low unemployment rate means that a lot of people are currently working and making money. Real income per household is up 2.5 percent which means that each household has more money to spend. Individual people as well as families are pumping money into the economy at an alarming rate and eventually this is going to cause rapid inflation that we have not seen since the 2008 recession. Low unemployment is a good thing, but only to a point because pushing past full employment does have economic consequences.
Recently, the Federal Reserve’s Open Market Committee has been trying to reign in this bullish economy. They have done this by slowly raising the Federal Funds Rate in order to combat inflation. Currently the inflation rate is at 2 percent on the year, but it was forecasted at 2 percent in the month of October. The Federal Reserve’s goal is to keep inflation around 2 percent. While they are on target for the year, the monthly inflation rates have been steadily rising which shows that inflation is going up month by month. So far, they have done a good job of keeping inflation in check, but with the Trump administration’s new tax cuts, the Open Market Committee has voiced concerns that it could push the economy over the edge. In 2017, the Federal Funds Rate, which is an interest rate that is placed on loaning money by the Fed, was 1.5 percent. As of last month, they increased the rate to 2 percent. This is a large change in monetary policy that reflects the Federal Reserve’s urgency to reign in the economy. The Fed has raised the Federal Funds Rate three times this year and expects to do so once more this year, either in November or December. This kind of rate hiking has not been implemented in the United States since before the recession of 2008. This indicates that we may again be reaching the peak of the economy. This along with the rapid growth of our GDP and extremely aggressive stock market will lead to our downfall yet again.
In the last year, our country has seen an explosion in our GDP growth. It has expanded quickly, and by a large margin. In January of 2018, our GDP growth rate was at 2.2 percent. In July of 2018, it had grown to 4.2 percent. A 2 percent rise in GDP in such a short amount of time is unheard of in economic terms. To put this in perspective, the last time we saw a 2 percent rise in GDP from any span of time was the two year period from July 2015 to July 2017. This same rise has now occurred within only a quarter of that time period. This sort of explosion is not sustainable by any standard or measure and it is due in part to the massive tax cuts that the Trump administration has implemented. Normally tax cuts are implemented during a recessionary period to inject money into the economy but for some reason these cuts were implemented during an expansionary period. While it does have some merit in certain situations, this goes against Keynesian economics’ basic principles of fiscal policy. Normally taxes are increased during expansionary periods in order to stabilize the economy. Currently, this administration is using an expansionary fiscal policy that pushes our country’s production possibilities curve past its peak. They then expect the Federal Reserve to be able to keep up. On top of this, our stock market has hit new highs as this bull market is part of the reason that the GDP is expanding at an accelerating rate.
One of the most significant reasons that the United States economy will soon retreat back into a recession is that a large portion of companies publicly trading on the stock market are in a bubble. A bubble is when a company or a group of similar companies are far overvalued. They are overvalued because their stock prices and therefore the value of the companies do not reflect real production or profits. These companies are simply stagnating in terms of production while their value on the market increases due to stock futures an investors’ expectations. While stock prices remain high, eventually the market will adjust and drop off, as it always does in a bubble. When this happens, aftershocks will ripple throughout the entire economy. Investment in real estate and local businesses will drop off, companies will lay off workers due to the drop in the value of the company, and inevitably the drop in profits. The market is already anticipating this adjustment in the form of investors reallocating their investments to more defensive stocks. According to Thomson Reuters, from June to October Telecommunications are up 10.4 percent, the Consumer Staples Select Sector is up 10.8 percent, and Vanguard Healthcare is up 14.3 percent. These investments usually rise during recessionary periods because they are considered safer investments. This may indicate that investors are beginning to expect an economic shift. Even recently, the stock market is starting to become unstable and investors are fearful for the future. On October 9, the Dow Jones Industrial Average dropped by 838 points. That is a 3 percent drop in just one day. On the same day, the CBOE volatility index went from a 15 to a 22. This index is nicknamed the “fear index” and is used to measure investor sentiment. This market drop is not an anomaly. On October 10, the DOW dropped another 300 points and the fear index rose to 25. Then just yesterday, on October 18 it dropped an additional 300 points. Recently, this stock market has reflected an unstable economy and it will continue this volatile activity which will reverberate throughout the economy.
Now, I know that this is a lot of information to take in, and not something that we as common citizens can do a lot about. However, this is an extremely aggressive policy tactic implemented by the Trump administration that we should be paying attention to because it could cause the economy to fail. We are operating in uncharted territory in terms of the economy. We are pushing past what our boundaries should be and this will have consequences. As for me, I will be paying attention for the next two years on whether or not these trends continue. The economy is of utmost important to the nation and it is something that should be kept in mind for the 2020 elections. It would be a shame to bite off more than we can chew and reap the consequences.