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You Decide: What’s Behind the Three Top Economic Issues?

Downtown Raleigh, east of campus.
Downtown Raleigh, east of campus.

By Dr. Mike Walden

When I was a kid in the 1950s, we used to call the middle months of the year the “lazy days of summer”. School was out, families were on vacation and the hot weather just seemed to slow things down.

But with today’s fast-paced world, year-round schools and air-conditioning, I don’t know that we can call summertime “lazy” anymore. And we certainly can’t call the economy lazy. In fact, in recent weeks we’ve had a flurry of important economic announcements and decisions.

As a result, I’ll give you a “three-fer” in today’s column. I’ll example three top economic stories of recent weeks, try to explain what’s behind each story, and then – as always – let you decide if my analysis makes sense.

First up is the Federal Reserve’s (the “Fed”) decision to lower their key interest rate by one-quarter of a percent. This move broke the string of successive rate hikes by the Fed over the past five years. And although the Fed telegraphed its move well in advance, a year ago most economists – including yours truly – didn’t see the rate cut coming. In fact, at that time most economists thought the Fed would continue to raise rates.

One reason we thought this was because that was the job of the Fed. To use the Goldilocks analogy, the Fed wants the economy to be “not too hot, but not too cold”. If the economy is growing too fast (too “hot’), the Fed worries inflation will get out of control. Conversely, if the Fed sees the economy growing too slowly (too “cold”), then the concern is it won’t take much to snuff out the growth and plunge the economy into a recession.

Therefore, to meet its goal of a “just right” economic growth rate, the Fed usually raises interest rates when economic growth is accelerating, and the Fed lowers rates when economic growth is sputtering. The economy has now been expanding for ten straight years – a record – and last year (2018) the growth rate jumped higher.  This is why economists like me thought the rate-raising would continue.

So what happened? Fed Chair Powell said two negative factors prompted the Fed to rethink their interest rate policy. One is stagnant economic growth in many parts of the world, including Europe and Japan. Second is the adverse impacts of the on-going trade war with China. Add to this the fact that our economy has slowed considerably in the last three months, and you have a situation where the Fed is now worried more about the economy being “too cold” rather than “too hot”.

The big question now is, will the Fed make further future cuts? Powell didn’t say. I think the Fed will follow a “wait and see” approach.

One of the situations the Fed will be watching is our trade tensions with China, and this is my second story. The trade battle between the US and China reached a heightened level when President Trump recently announced new 10 percent tariffs on Chinese consumer products sold to the US would take effect on September 1st.

The Administration’s announcement means almost all products China sells to us will be subject to tariffs. China has retaliated with tariffs on our sales to them, and in North Carolina this has particularly hurt our farmers and manufacturers. China has also said their investments in the US will be curtailed and purchases of US farm products could be suspended. Such moves would hurt the North Carolina economy.

Why are we engaged in a trade war with China if it hurts the economies of both countries? The US has long had complaints about unfair trade practices used by China. Rightly or wrongly, the Trump Administration has decided to “get tough” with China as a motivation for them to change these practices, even if it means some short-run pain for the US economy.

Clearly economists – including those at the Federal Reserve – are worried about how great this pain will be. It’s a big reason why the Fed cut their key interest rate. If the trade dispute persists, more rate cuts may be coming.

Let’s end with some good news – my third story of continuing strength in the job market. The July numbers were just released, and they appeared to be good. Substantial (over 160,000) net new jobs were added, average wage rates inched up, and more individuals entered the labor market to find work.

Yet the unemployment rate didn’t drop. Why not? It’s due to the way the main jobless rate (the government actually releases six different unemployment rates) is calculated. To be counted as unemployed, a person has to be without a job and actively looking for a job. But some people who have been jobless for a long time may temporarily stop looking for work. When that happens, they are not counted as unemployed. Indeed, they are not even considered to be in the labor force.

Yet when the economy improves, the process works in reverse. More jobless folks resume looking for work, and while they are doing this, they are now classified as unemployed. So the increase in jobs and employment can be countered by the increase in job seekers, thereby leaving the unemployment rate unchanged. This is exactly what happened in July.

These are my views on three important stories – interest rates, trade, and jobs. You decide if my analysis seems reasonable. Even if it isn’t, I do have one thing right. The future stories of interest rates, trade and jobs will largely determine how our economy changes.

Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook and public policy.