If you had to choose one word to describe America’s economic expansion, now in its fifth year, you should go with “halting.”
Economic growth and job gains impress one day and then disappoint the next. The upshot: growth that might be considered acceptable during normal times has instead appeared painfully slow for a recovery from the deepest recession in generations.
The mixed messages in the data has prevented analysts, market participants, and the rest of us from getting a handle on what is going on with the economy. Consider the whipsawing of GDP data in recent quarters. The second half of 2013 yielded the strongest six-month growth since the recession, and then the Bureau of Economic Analysis announced that the economy shrank by nearly 3% in the first quarter of 2014.
That kind of drop in output in the middle of an economic expansion is nothing short of unprecedented. It only occurred one other time in history, and that took place during the very same weak expansion—back in 2011.
At the same time, job growth has continued to accelerate, averaging 207,000 new jobs over the past 12 months—the largest 12-month average at any point since the recovery began.
Simply put, you can’t have job growth without commensurate economic growth, and vice versa. Well, this week the other shoe finally dropped, with a slew of data showing that the U.S. economy is settling into cruise control rather than heading towards a ditch.
First, we had Case-Shiller data released Tuesday, which showed that home price increases are slowing but strong, just as one would expect as the housing market normalizes. That was followed by a release in consumer confidence index data from the Conference Board, which showed an increase from 86.4 in June to 90.9 in July. By comparison, the average reading in 2013 was 73.2, and it was at 67.1 in 2012.
Then, on Wednesday, the Bureau of Economic Analysis reported that the economy expanded at an annual rate of 4% in the second quarter, and that it shrank in the fourth quarter by 2.1% rather than the previously reported 2.9%. So, we have had above-trend economic growth in three of the past four quarters, making the continued growth in employment seem much more understandable and giving some credence to the explanation that poor weather led to the first-quarter economic contraction.
The Federal Reserve followed all of this data with an announcement that it would cut its monthly purchases of mortgage and U.S. government debt by $10 billion per month. The Fed is now buying just $25 billion per month in bonds and preparing to end its quantitative easing stimulus program in October of this year. The Fed’s statement gave a nod to the improvement in economic data, acknowledging that “inflation has moved somewhat closer to the Committee’s longer-run objective” of 2%, but stressing that the labor market was still a long way from its full-employment goal of 5.2% to 5.6%.
In other words, the Fed is still on course to end QE, but it sees no reason to raise short-term interest rates in the near future. Inflation is low, below the Fed’s target even, while unemployment is falling and the economy is in position to achieve consistent growth in the next couple of quarters. While no one can predict the future, the data is hinting at the coming of rosier days, more so than at any point in the past five years.
