Economy gives Fed confidence
Resilience of American job market a factor that may help central bank decide to raise interest rates again
WASHINGTON — In the United States and around the world, economic strength isn’t what it used to be. But everything is relative.
The Federal Reserve is set to raise short-term interest rates Wednesday for the third time in six months — a vote of confidence in the American economy and especially in the resilience of the U.S. job market.
The European Central Bank is edging toward ending extraordinary steps to speed growth in the 19 countries that use the euro, a sign that an agonizing era of stagnation may be nearing an end. China has managed to keep growth expanding at a solid if slower pace. And international agencies have lately issued upbeat reports on the global picture after persistent weakness in the years since the Great Recession.
Yet neither the U.S. nor the world economy is likely to regain the robust health that prevailed before the
recession struck a decade ago.
“We certainly would expect slower growth than we had in the mid-2000s,” said Sara Johnson, research director for IHS Markit.
The IMF foresees the global economy growing 3.5 percent this year — up from 3.1 percent in 2016 but well below the 4 to 5 percent growth typical of the mid-2000s.
A big problem is that the richest countries can’t count on steadily growing workforces to drive expansion because their populations are aging. And across the globe, for reasons that largely confound economists, countries are struggling to generate the acceleration of worker productivity that normally underpins prosperity.
Still, for now, the outlook is at least encouraging.
In the United States, factories have expanded for nine straight months, rebounding from a slump caused by cuts in the energy industry and by a strong dollar, which made American goods costlier overseas. The stock market is surging amid stronger corporate profits, brightening economic forecasts and hopes that President Donald Trump and the Republican Congress will cut taxes and regulations.
Some economists and market analysts worry that stock prices— which tend to rise when rates are low — have already climbed too high. In fact, Johnson at IHS Markit said she suspected that the Fed may be ratcheting up rates partly to take a little air out of a potential bubble in stock prices before it bursts.
The U.S. unemployment rate is at 4.3 percent, a 16year low. Super-low unemployment is giving the Fed confidence to lift U.S. rates — gradually — even though inflation remains stubbornly below the Fed’s 2 percent target.
Still, the American economy is hardly sizzling. Annual growth hasn’t hit 3 percent for a full year since 2005. It inched ahead last year at just 1.6 percent. And economists say hiring can’t remain healthy for long if consumer and business spending and investment don’t pick up and accelerate the underlying economy. Most economists do expect U.S. growth to pick up this year after expanding at a dismal 1.2 percent annual pace from January through March.
The Trump administration insists it can lift growth above 3 percent a year by cutting taxes, slashing regulations and spending more on roads, bridges and other infrastructure projects. But most economists are skeptical — and not just because Trump’s agenda has been delayed by political turmoil. Already, hiring has slowed. The economy added just 362,000 jobs from March through May .
One reason: With unemployment so low, “the U.S. is running out of people to hire,” said Eric Lascelles, economist at RBC Global Asset Management.