Markets May Be Shaky but the Economy Is Doing Fine
Economy more cheerful than markets
Growth likely to accelerate near term
Fed tightening pace will be critical
Although financial markets have stumbled recently, the U.S. economy continues to grow. In fact, the economy’s vital signs are the strongest in a very long time. Confidence is booming, the labor market just posted its strongest quarter since 2016, and business surveys are signaling some of the best economic conditions of the expansion thus far.
Beyond the current health of the economy, forces in place are likely to accelerate growth, at least near term. The tax cut package and recently signed budget agreement will not only boost household incomes but should also give businesses an incentive to ramp up investment after years of caution.
Stronger economic growth is welcome news since the current expansion has been the weakest on record. But what this cycle has lacked in strength, it compensated for in duration. In April, the expansion became the second longest on record, something few would have expected in June of 2009 when the economy began its halting recovery from the Great Recession.
None of this should encourage complacency, and it is important to keep monitoring risks. While the Trump administration’s proposed tariffs on China may be primarily a negotiating tactic, uncertainty about possible trade wars could begin to overshadow decent signals from the economy. Another risk is that faster growth could hasten the expansion’s expiration date if fiscal stimulus does not come with increased productivity. A major reason the current cycle has lasted so long is that growth has been so slow. New spending may accelerate growth, but it also raises the risk of overheating.
The key question is how the Fed will behave. There is an old adage that expansions don’t die of old age but are murdered by central banks. However, we think the point where higher interest rates undermine economic health is still some ways off. Overheating pressures that have historically prompted aggressive Fed tightening do not seem imminent. Instead, policymakers may be inclined to let the economy run a little hotter rather than risk tightening too quickly and ending the expansion prematurely.
No expansion lasts forever, and we’re almost certainly closer to the current cycle’s end than the beginning. Still, signs of potential economic weakness or recession remain low. As always, we’re scanning the horizon for indications of trouble, but for now the coast looks clear and the outlook bright.