AUGUST
2015

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

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08-27-15

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What's Going On in the U.S. Economy?


Students are back on campus at Purdue University, and it’s back to the classroom for me, too. So I need to get my head together about what’s happening in the U.S. economy. 

As of August the expansion after the Great Recession is six years and 2 months old. It’s already the fourth-longest expansion since World War II. It’s been slow going, though. Gross Domestic Product grew 2.3 percent above inflation during the past year. We haven’t seen annual growth above 3 percent during this recovery, which is very unusual. But growth hasn’t fallen below 1.5 percent either. It’s been one of the steadiest six-year periods since World War II.

Maybe the economy will grow faster. Consumers have reason to spend more. Job prospects have improved, home prices have risen, gas prices have dropped and consumer confidence is up. The stock market has been discouraging lately, but, still, over the past year consumers have stepped up their purchases. 

Home construction has done well, too. The stock of homes for sale remains low, so home prices have been rising. That’s incentive to build, and residential construction has been the fastest growing part of GDP over the past year. Building permits are rising, which means more homes may be built in the next few months, even if mortgage interest rates rise a little. 

Now for economists’ favorite phrase: “on the other hand.” Business investment has grown slowly, and since capital goods orders are down this year growth is unlikely to increase. China’s growth has slowed, Europe’s is slower, and Japan is on the edge of recession again. The world’s spending on our exports won’t be rising very much. The value of the dollar in exchange markets is way up this past year, which makes our exports more expensive for the rest of the world. That discourages exports and encourages U.S. consumers to buy more imported foreign goods (rather than products produced here). Neither the federal nor state and local governments are buying much more from businesses, either.

Add it up, and there’s not much reason to think that growth will top 3 percent over the next year.  But with consumers spending and homes being built, growth should remain slow and steady. I’ll guess that 2.3 percent growth will continue for another year.   

The unemployment rate was 5.3 percent in July, down from 10 percent in October 2009. In the past, slow GDP growth could not have brought the unemployment rate down so far. But the labor force is growing more slowly now. Boomers are retiring, fewer millennials are entering, and a large number of potential workers is still feeling discouraged. With fewer job searchers entering, slower growth creates enough new jobs to bring the unemployment rate down. The unemployment rate has less room to fall now that there are fewer unemployed people out there.  That means a smaller drop over the next year, let’s say to 4.9 percent.   

The inflation rate over the past year was just 0.2 percent, measured by the Consumer Price Index. That’s mostly because of the gasoline price drop. Not counting oil, the “core” inflation rate was 1.9 percent, which is near the rate of the past few years. There’s less slack in the economy, so businesses might begin to see some rising costs. Maybe even rising wages! So I’ll guess that inflation will rise, maybe to 2.2 percent for the next 12 months.

The Federal Reserve has held its federal funds interest rate near zero since the end of 2008.  They’ve been hinting that they’ll raise the rate soon. Still, with growth slow, inflation low and the dollar’s exchange value rising, they’ll probably be cautious. Let’s say two quarter-point increases over the next year, which would put the federal funds interest rate and the three-month Treasury bond rate at 0.5 percent by mid-2016. Likewise, the 10-year Treasury interest rate should rise about half-a-point to 2.5 percent.

Like anybody really knows! What if the Greeks and Germans get at each other’s throats again? What if China implodes? What if Wall Street panics at the first sign of a Fed rate hike? What if Congress shuts down the federal government again? Any of these “shocks” could toss this forecast out the virtual window. 

My best guess, though: Slow but steady for another year.

 

 

Writer: Larry DeBoer
Editor: Keith Robinson