A better economic outlook is to give the Fed confidence to act

WASHINGTON – In the United States and around the world, the economic strength is not 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 U.s. economy and especially in the resilience of the U.S. labor market.

On the other side of the Atlantic, the European Central Bank is the edge in the direction of the end of extraordinary steps to increase the speed of the growth in the 19 countries that use the euro, a sign that a painful era of stagnation may be nearing its end.

And international organizations have lately issued upbeat reports on the global picture, after continued weakness in the years since the Great Recession.

But neither the U.S. nor the world economy is likely to weather the good health that prevailed before the recession hit a decade ago.

“We certainly would expect slower growth than we had in the middle of the years 2000,” says Sara Johnson, senior research director for IHS Markit.

The IMF foresees the global economy growing by 3.5 percent this year — up from 3.1 percent in 2016, but well below the 4 to 5 percent growth typical of the middle of the years 2000.

A big problem is that the richest countries cannot count on steadily growing number of employees to drive expansion as the population ages. And all over the world, for reasons that are largely confound economists, countries are struggling with the generation of the acceleration of productivity that normally forms the underpinnings of the prosperity.

Still, for now, the prospects are at least encouraging.

The unemployment rate in the euro area reached an eight-year low in April. China has managed to keep the growth of the expansion of a solid as a slower pace, as far as the defy of those who were warned that the world’s second largest economy was headed for a hard fall. China is one of the main consumers of the world’s natural resources. The resilience helps to explain why the prices for raw materials — oil, copper — stabilized after tumbling from 2014-2016 differs and slowdown of the global growth.

In the United States, the factories have expanded for nine straight months, rebounding from a downturn caused by cuts in the energy industry and by a strong dollar, which made American goods more expensive abroad. The stock market is rising on stronger corporate profits, the brightening of the economic forecasts and hopes that President Donald Trump and the Republican Congress will cut taxes and regulations.

The U.S. unemployment rate is at 4.3 percent, a 16-year low. Super-low unemployment is giving the Fed confidence to raise US rates — gradually — even though inflation remains stubbornly below the Fed’s 2 percent goal.

Still, the U.s. economy is barely sizzling. The annual growth is still, do not press the 3 per cent for a full year since 2005. It inched ahead of last year at a meager 1.6 percent. And economists say that hiring can not remain healthy for long if consumers and company extend pick-up and acceleration of the underlying economy. Most economists do expect the US growth to pick up this year, after the expansion in a dismal 1.2 percent annual pace from January through March.

The Trumpet administration calls for the lifting of the growth above the 3 percent a year by cutting taxes, cutting regulations and spending more on roads, bridges and other infrastructure projects. But most economists are skeptical — and not just because Trump’s agenda was delayed by the political unrest. All hiring is delayed. The economy added just 362,000 jobs between March and May is the weighted average of 121,000 a month — the weakest three months of hiring since 2012.

One of the reasons: With the unemployment rate so low, that “the US is running out of people to hire,” said Eric Lascelles, chief economist at RBC Global Asset Management.

And America’s worker productivity growth is dismal, with an average of only 1.2 percent per year since 2007 — half of the annual gains registered from 2000 to 2007. Only if workers can generate more value per hour on the job do they generally speed up the economic growth and enjoy higher incomes.

Outside of the United States, analysts point to other reasons for concern.

Despite a relatively recent upbeat assessment, for example, the world bank says the global economy “vulnerable.” It warns for the risks of rising trade protectionism, political conflict and the possible financial consequences of the Fed’s expected rate increases.

Sharper-than-expected raising of interest rates would, for example, a rattle investors and the value of the US dollar as more investors pour money into the haven of Treasurys. A strong dollar would, in turn, hurt U.S. exporters. It would also squeeze foreign companies in dollars borrowed and would have to put more and more money in their local currencies to pay back their accounts.

IHS Markit’s Johnson says that the world economy is enjoying a “cyclical pick-up” of this year. But they caution:

“It will not match the gains of an earlier period.”


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