Economic Growing Pains

While it was no surprise that the Fed took no action at last week’s FOMC meeting, there was something interesting contained in the officials’ economic projections. The central bank lowered its longer run expected growth rate from 2 percent to 1.8 percent. This downward revision started in 2012, when the Fed expected growth to be 2.4 percent, which at the time, seemed a far cry from the average pre-crisis annual growth rate of about 3 percent. 1.8 percent seems pretty rotten, but to judge it more effectively, historic data can help. From 1985-2015, GDP averaged about 2.75 percent, but during the post-technology boom through last year (2001-2015), growth averaged…1.8 percent. This more recent slowdown is at the core of the argument among the economic wonks: The doom and gloomers (think former Treasury Secretary Larry Summers) say that the US economy is plagued by “secular stagnation,” where individuals and companies are not tempted to invest, savings’ pile up and growth slumps. Amid this environment, central banks try to nudge participants to do something with their cash by slashing interest rates and buying bonds, but over time, these policy measures lose their oomph.

The other side, led by former Fed Chair Ben Bernanke, argues that weaker economic growth is due to temporary cyclical and special factors and eventually the economy will revert back to its old ways. For the past year and a half, Bernanke has argued that the US economy is working its way out of this “cyclical stagnation,” proof of which can be seen in the improving labor market, and “the availability of profitable capital investments anywhere in the world should help defeat secular stagnation at home.”

Hindsight will determine which side is right, but the bottom line, according to Paul Ashworth at Capital Economics, “is that GDP growth has been disappointing.” The lowered Fed projections are simply an acknowledgement of what we have been experiencing on the ground. This week, the government will release the final estimate of second quarter growth, which is expected to edge up to a still-paltry 1.3 percent from the previous reading of 1.1 percent.

The lowered estimate of growth is good to remember, especially when Republican presidential candidate Donald Trump predicts that his tax cut plan will boost economic growth of 3.5 to 4 percent, more than two times what the Fed believes will occur and well-above the 2.75 percent seen from 1985-2015. Trump cited 4 percent growth last week, after doing so earlier this month. As a point of reference, the US economy has not seen 4 percent growth since the height of the dot-com bubble in 2000.

FAFSA UPDATE: The Free Application for Federal Student Aid form (“FAFSA”) is the gateway to education money and it is now available on October 1, three months earlier than in previous years. Given how expensive it is to attend college, here’s a mind blowing statistic from NerdWallet: High school graduates left $2.7 billion in FREE federal grant money on the table over the last academic year, because they did not complete the form…for more on this topic, check out: College Money for the Taking!

MARKETS:

• DJIA: 18,261, up 0.8% on week, up 4.8% YTD
• S&P 500: 2164, up 1.2% on week, up 5.9% YTD
• NASDAQ: 5305, up 1.2% on week, up 6% YTD
• Russell 2000: 1254, up 2.5% on week, up 10.5% YTD
• 10-Year Treasury yield: 1.62% (from 1.69% week ago)
• British Pound/USD: 1.2973
• November Crude: $44.48, up 2% on week
• December Gold: $1,341.70, up 2.4% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.21 (from $2.19 wk ago, $2.29 a year ago)

THE WEEK AHEAD:

Mon 9/26:

10:00 New Home Sales

10:30 Dallas Fed Survey

Tues 9/27:

9:00 S&P Case-Shiller Home Price Index

10:00 Consumer Confidence

Weds 9/28:

8:30 Durable Goods Orders

Thursday 9/29:

8:30 GDP

9:00 Corporate Profits

10:00 Pending Home Sales Index

Friday 9/30:

8:30 Personal Income and Spending

9:45 Chicago PMI

10:00 Consumer Sentiment

Saturday 10/1

FAFSA Form Available (3 months earlier than in the past)