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June Job Numbers Are Good, But How Strong Is the Economy?

June Job Numbers Are Good, But How Strong Is the Economy?
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Thursday, 11 July 2019 02:43 PM Current | Bio | Archive

The recently released jobs report for the month of June showed that 224,000 jobs were added. This number was welcomed because in May only 72,000 jobs were added. Since we are currently in the longest expansion ever, it is reasonable to wonder just how strong the American economy is today. And how long will the expansion last?

Actually, there is an argument that says we are not in the longest expansion ever, even if the government’s statistics say we are. In fact, the expansion really started in 2017, not 2009, so we are only in the third year. Since expansions tend to last 5 to 7 years, we should have a few more years until a recession comes.

This view is supported by noting that the very weak recovery from the last recession really lasted until 2016. During that eight year period economic growth average just over 2%. That is the growth rate of a recovery, not an expansion.

Finally, in 2017, the removal of growth stifling and counter-productive regulations coupled with the anticipation of future growth-inducing actions created an overall optimism that really started the expansion. Growth increased to 2.5%. Then, in 2018, Congress repealed the growth stifling portions of the Dodd-Frank law.

The burdensome regulations placed on banks by Dodd-Frank were meant to eliminate predatory lending. The problem was that the restrictions were so severe that they reduced all bank lending. When banks are not lending, economic growth slows. The repeal tended to increase economic growth.

Also effective in 2018, Congress cut taxes for all Americans and for corporations. The middle-class portion of the tax cut stimulated demand from consumers. The upper class and corporate tax cut stimulated supply from business. In 2018, growth finally reached 3%, a rate not seen since 2005.

In 2019, wages starting rising more than 3% annually. The positive effects of the tax cut continue to add to growth. The tax cut was geared to not only help the middle class, but to create capital for expansion. The increased capital investment led to increases in worker productivity.

That means wage increases won’t lead to higher labor cost. In the first quarter of 2019, productivity increased at a 3.4% rate while wages increased a 3.1% rate, so labor cost decreased.

Since prices are rising at less than 2% annually, workers are seeing real increases in their incomes.

Normally during the early years of expansion, the economy sees very high growth rates. In 1984, just two years into expansion, the economy grew at 7.4%. In the current expansion we are struggling to maintain 3% growth. That can be fixed, however.

From the time President Trump was elected until the end of 2018, the Federal Reserve (FED) raised interest rates eight times. Although it is true that the rates were near zero and they were only raised to 2 ½%, the rapid increase in rates tended to slow economic growth.

From a business person’s perspective, the increased in rates over the two year period, meant their business interest expenses more than doubled.

The FED has realized that they may have acted to hastily. While they were raising rates, they also moved to reverse the quantitative easing that followed the 2008-2009 recession, so they started to sell some of the bonds they were holding. So far they have sold nearly half a trillion dollars’ worth of bonds. This reduces the money supply and tends to slow economic growth.

Those actions by the FED put enough downward pressure on growth to keep economic growth at about 3%. It looks like they may reverse course and reduce rates when they meet later this month. By then they will have likely seen the preliminary numbers for the growth rate in the second quarter of this year.

That growth rate looks like it will be in the 2% to 2 ½% range. If that is the case the FED will reduce interest rates by at least a quarter of a percent and perhaps a half of a percent.

If that happens, and if there is also some positive news in our battle to seek free and fair trade, the growth rate could increase significantly. That would certainly be welcomed since the U.S. hasn’t seen 4% annual growth since 2000.

Dr. Michael Busler, Ph.D., is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years.

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DrMichaelBuslerPhD
The recently released jobs report for the month of June showed that 224,000 jobs were added.
employment, job numbers, economy
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2019-43-11
Thursday, 11 July 2019 02:43 PM
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