In the third quarter of 2019, the US economy grew by a 2.0 percent, year-over-year, rate of growth.
This growth rate was slightly below the 2.2 percent compound rate of growth of the economy during the current economic expansion, now in its eleventh year.
Inflation in the United States remains below the target set by Fed officials of 2.0 percent.
The Federal Reserve reduced the range for its policy rate of interest to 1.50 percent from 1.75 percent, which was the third reduction that took place during this year.
Officials at the Federal Reserve seemed to focus more on conditions experienced in the global economy, rather than just on the state of the US economy.
In a press release put out by the Fed after the meeting of the Federal Open Market Committee (FOMC) on Wednesday, the following reason was given for the move:
In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent.
Fed officials, including Fed Chair Jerome Powell, attempted to signal to the financial markets that they should not expect another drop in the policy rate of interest soon. The Fed will be data-driven and not responsive to other forms of pressure.
The Federal Reserve action does not appear to be an effort to achieve faster economic growth. Right now, officials seem to be content with the current rate of economic expansion and, although they would perhaps like to see a little more inflation in the economy, their primary focus seems to be on the stability of markets, both domestic and international.
Federal Reserve forecasts have not changed for months. And, their projections have fairly closely tracked the actual behavior of the economy… better than most other forecasters.
For this year, the Federal Reserve is expecting the economy to post a 2.2 percent rate of change. The rate of growth drops to 2.0 percent in 2020 and 1.9 percent in 2021. Just about where we are today. And, for inflation, 1.8 percent is expected this year, 1.9 percent is expected for 2020 followed by 2.0 percent in 2021.
Unemployment is expected to remain below 4.0 percent for the same time period. Nothing spectacular, but steady as she goes.
The crucial conclusion from this picture, I believe, is the fact that the supply side seems to be dominating the expansion of the economy. The demand side of the economy seems to be reacting to the resources that the supply side is providing it.
Consumer spending, as it has from the beginning of the period of expansion, seems to be the steady, stable component of demand, increasing step by step with the increases in overall income provided by the supply side of the economy.
All the other components of acquisition seem to be passive and just, more or less, responsive to the steady beat of the economy. Business capital expenditures and investment in physical capital seem to be generally passive, taking place as needed.
Business expenditures on physical capital has been tepid throughout the expansion, but has become even more so as the uncertainty surrounding the possibility of a continued trade war between China and the United States has grown. Right now, reports seem to support the suggestion that most businesses are holding back any major spending in this area until the future of trade becomes clearer.
Government spending is also only having a minor impact on economic growth as the earlier tax reform program signed in December 2017 peters out. Again, disappointment in this program was exacerbated by the use of many recipients of tax benefits to buy back corporate stock.
The picture thus emerges that economic growth will continue to be defined by the supply side of the economy and this will continue to be held back by the slow growth in labor productivity due to the absence of business investment to spur on this factor.
This just reinforces what I have presented above when I have argued that at this point in time, monetary policy will provide very little help in getting the economy to grow faster. The best we can expect from the monetary authorities at this time is behavior that gives us confidence that they are there for protection on the downside.
Chairman Powell and the Federal Reserve must provide us with confidence that they will not let things fall apart. And, a big part of this concern is focused upon what is happening in foreign economies and foreign markets. I believe that, given the Fed’s quotation above, that the Fed has its focus on the right place. Otherwise, it can do very little.
The interesting question underlying this picture is about whether or not the current data are picking up the whole scene. I have recently written about the changes that have impacted the economy and how these changes are impacting the economy, the job market, the stock market, and other areas.
If the supply side of the economy is dominating the expansion of output, and business capital expenditure has been relatively passive in the current picture, maybe business intellectual capital investment has become a major component of the economic picture, but we just don’t know how to account for it at the present time.
Thus, the economy is growing, but only modestly, while unemployment has achieved a fifty-year low and the stock market continues to hit new highs. Even with the slow economic growth, the expansion has extended into its eleventh year, a new record, and the expansion has been relatively steady.
Earlier over the past decade of growth, basically the whole stock market rose, supported by the efforts of the Federal Reserve to underwrite the economic expansion. Now, as discussed above, since the Federal Reserve has backed off from its earlier position, the stock market has reached new highs, but has been led primarily by the large tech sector.
I ask, have times changed so that we have to look at things somewhat differently?
Viewing the picture in this way, I come up with the conclusion that going forward, we should not ask for too much economic growth and we should not ask too much of the Federal Reserve.
What we do need to do is support the transition taking place in the world and support the factors that support this movement. We should also retrench our thinking about the economy in terms of how we measure it. Finally, we should focus on policies that help to underwrite the transition and augment the infrastructure that will facilitate this transition.
Maybe, for the time being we should concentrate on the fact that unemployment is so low and the stock market is so high. Maybe we should focus on how we might maintain this picture.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.