So much hand-wringing accompanied the Federal Reserve’s decision last week to raise short-term interest rates, you’d think the economy is in deep trouble.
Sure, the job-creation numbers for July were less than hoped for. The stock market stumbled, and economists softened their predictions for second-half growth. When the Fed tightened rates in the face of those signals, some pundits said Chairman Alan Greenspan had lost touch.
Not quite.
In fact, the economy keeps chugging along. Raising the federal funds rate to 1.5 percent was a minimal step toward heading off inflation, especially in the overheated housing market.
The current soft patch in economic growth amounts to less than meets the eye. Viewed in perspective, the latest data show relatively stable conditions–not booming, not plunging. And that’s not a bad place for the economy to be.
This week will bring another round of government numbers, including the consumer price index, housing construction, industrial production and the index of leading indicators. Given the emphasis these figures are receiving in the presidential campaign, expect to hear a lot of spin: The economy is strong! No it’s not!
Conventional wisdom suggests that when the economy soars, the incumbent benefits. When it’s flagging, the challenger gets an edge. But what about when it’s moving along at a sustainable, measured pace? That question may be answered Nov. 2.
For the last four quarters, the annualized growth rate clocked in at a robust 4.8 percent, as the economic recovery kicked in. During the second quarter, however, growth slowed to a 3.0 percent annualized rate–still not bad, but not gangbusters, either.
As the Federal Open Market Committee noted after raising the federal funds rate, the rise in energy prices has created a drag. But it’s important to remember that global economic growth is the biggest factor behind the oil run-up. Such vigorous demand is a sign of strength.
Other important indicators are flashing positive. While still reluctant to hire, corporations are spending on equipment, making long-term investments aimed at boosting productivity. That’s a plus.
At the same time, one widely followed measure of consumer confidence has reached a two-year high, and retail spending has held up better than might have been expected with pump prices as steep as they are.
Some 85 percent of Americans describe their household financial situation as good, very good or excellent, according to a recent survey of 1,100 adults by pollster American Research Group.
“When I look at the data, I see nothing extremely dangerous for the economy,” says economist Brian Wesbury of Chicago’s Griffin, Kubik, Stephens & Thompson, Inc. “These are really good numbers.”
Yet even though most Americans say they’re doing better, enough uncertainties exist, such as the threat of terrorism, to muddy the outlook.
When the Fed raised rates, it surprised observers by dispensing with some of the typical hedging in its comments. The economy, it said, “appears poised to resume a stronger pace of expansion going forward.”
That was Greenspan’s message to the hand-wringers. It boils down to one word: Chill.
