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Ups and Downs - Summer 2018

By any measure, the economy is exceptionally strong. The unemployment rate was 3.9% in July and has been below 4.5% for over a year. We have seen an extraordinary run of net job gains which have now continued uninterrupted for almost eight years. The last time we registered a monthly job loss was September 2010. May and June both saw net gains of more than 200,000; in February, the gain was 324,000.

The markets have had their ups and downs this year, but remain at a level that can only be described as stratospheric. After peaking at over 26,600 in January, the Dow Jones fell to just below 24,000 in early February, but has mostly stayed above the 24,000 level since that time. The Dow is currently well above 25,000. Recall that, in March 2009 in the depths of the Great Recession, the Dow stood at just a little over 6,600.

Even Chicago, which has lagged the country in its economic recovery for most of the past decade, is starting to look like less of a basket case. The BLS estimates that the Chicago MSA had an unemployment rate of just 3.4% in May. Even the June unemployment estimate – up a full percentage point to 4.4% – is still much lower than at almost any point since the onset of the Great Recession.

With all this good news, is there any reason why we shouldn’t all be popping the champagne and drinking a toast to our new-found prosperity? Well, I hate to be a party-pooper, but I can think of a few!

If you’re looking for reasons our current Goldilocks economy might not last, you don’t have to look far. Maybe the best place to start would be tariffs. Our president seems to love them, and is convinced he can get a better deal for America by imposing them on, well, just about everyone, or so it seems. Clearly, the tariffs imposed thus far have not had a noticeable impact on the economy at a macro level, as evidenced by the low unemployment rate and booming stock market. But some sectors of the economy are beginning to feel the impact of these tariffs as the cost of certain goods rises, and demand for certain exports falls. Just ask Midwestern farmers how profitable their soybean harvests are going to be this year? That is, if they haven’t already sold the farm.

Like so many things related to Donald Trump, it is difficult to predict what will happen next, and how far he will push this anti-trade agenda. There are signs that the President may be taking a breather after his recent talks with Jean-Claude Juncker, head of the European Commission. Then again, this may be just a pause before he puts more tariffs into effect.

Another big risk to our current economic good times is rising interest rates. The recent announcement that the economy expanded at a 4% annualized rate during the second quarter is one reason the Fed announced their intention to keep raising short-term rates at their July 31-August 1 meeting. Although the Fed held rates steady at their last meeting, they also made it clear they were likely to raise rates at their Sept. 25-26 meeting, and possibly again before the end of the year. While 10-year Treasuries have been relatively steady in recent weeks in the 3% range, it seems likely they will keep climbing, increasing the cost of debt, and reducing profits.

If long-term rates don’t go up, it could mean the yield curve is starting to invert (i.e., short-term rates could rise above long-term rates). Market wisdom says that an inverted yield curve is a pretty good predictor of a coming recession. It’s been nearly ten years since the last one, so we are about due.

Another risk is a labor shortage. The low unemployment rate indicates that we are running out of people to fill the new jobs that keep getting added to the economy. This is happening at the same time that the current administration is making it more difficult for foreigners to immigrate to the country. With fewer available workers, the current torrid pace of growth will almost certainly have to slow.

Finally, the country is experiencing extreme income inequality, the likes of which we have not seen since the 1920s. With this inequality comes discontent, desperation and destabilization of our democratic institutions as both left and right run toward the extremes of their respective parties.

Apart from that Mrs. Lincoln, how did you enjoy the play? The economy is doing great, right? Who, me, worry?

Steve Cain is Secretary of RPBG. He writes articles and compiles content for our quarterly newsletter. The opinions expressed in this column are his own and do not necessarily reflect the views of RPBG and its Members.



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