June job numbers are good. But how strong is the US economy?
WASHINGTON. The recently released jobs report for the month of June showed that the American economy added 224,000 jobs. Economists and Republicans alike welcomed this number. In May, employment numbers only increased by 72,000 jobs. Many economists worried about this apparently steep decline.
Since America is currently enjoying its longest economic expansion ever, one can reasonably wonder: Just how strong is the U.S. economy? And how long can the current expansion last?
Recovery vs. Expansion
One school of thought denies that we are in a period of unparalleled expansion. That holds true even if the government’s statistics seem to contradict this observation. But in fact, the current expansion really started in 2017, not 2009. Meaning the economic boom is only in its third year.
Since economic expansions tend to last five to seven years, we should enjoy a few more years of growth until the next recession finally arrives.
Supporting this view, one can argue that the very weak recovery of the U.S. economy from the Great Recession really lasted until 2016. During that eight-year period, economic growth averaged just over an historically anemic 2 percent. That number reflects the growth rate of recovery, not an economic expansion.
Eliminating regulations and cutting tax rates helps the US economy
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 percent. Then, in 2018, Congress repealed the growth-stifling portions of the Dodd-Frank law.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 cuts stimulated supply from businesses. In 2018, growth finally reached 3 percent, a rate not seen since 2005.
In 2019, wages starting rising more than 3 percent annually. The positive effects of the tax cut on the U.S. economy continue to add to growth and to America’s job numbers. 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 percent rate while wages increased a 3.1 percent rate, so labor cost decreased.
Prices are rising by less than 2 percent annually. Workers see real increases in job numbers and wages.
Normally during the early years of expansion, the economy sees very high growth rates. In 1984, just two years into the expansion, the economy grew at 7.4 percent. In the current expansion, we are struggling to maintain 3 percent 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 percent, 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 too 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 the growth of the US economy 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 percent 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 percent annual growth since 2000.