Is the US economy’s current pace set to trigger major imbalances, disrupt the current cycle and spark off a significant downturn in economic activity?
The stockmarkets’ severe recent downturn reflects investors’ concerns on forthcoming trends for the global economy, and in particular the performances we can expect from the US. Firstly, they reacted to the change in stance from the Federal Reserve on forthcoming inflation trends, expected to converge towards the central bank’s target of 2% and stay there in the long term. Secondly, rising wages confirmed this idea of nominal pressure, even if the 2.9% gain announced in January’s figures was probably a result of the reduction in number of hours worked due to unusually cold weather conditions. Lastly, the handover at the Fed added another level of uncertainty. Janet Yellen did a good job of steering the US economy, will Jay Powell do the job equally well?
I have already written at length on these matters, and an article published on Forbes.fr will provide details on the uncertainties surrounding Powell’s arrival to chair the Fed. However, looking beyond these factors, a number of other questions are being raised about the US economy.
The first question involves economic policy and the way fiscal and monetary policies can coordinate against a backdrop of full employment. This coordination has worked pretty well so far. The US economy nosedived in 2009 and both policy areas instantly loosened: it was vital that every effort be made to avoid a drastic chain of events that would end up creating higher unemployment and a long-term hit to the standard of living. This approach was successful and the country hit its cycle trough in the second quarter of 2009, moving into an upward phase that has lasted ever since. Monetary policy continued to accommodate, but fiscal policy became restrictive in 2011 and then converged to a sort of neutral situation to avoid hampering the economy. This policy combination drove the US into one of the longest periods of growth it has enjoyed since the Second World War: the pace of GDP growth was admittedly not as brisk as before, but it did not trigger any major imbalances, as reflected by an economy running on full employment and continued moderate inflation, remaining below the Fed’s target. Continue reading