The good news is that the Federal Reserve thinks the economy is improving. The bad news is the Fed says GDP and employment won’t improve as much as it earlier thought.
According to a statement released by the Fed today, Ben Bernanke & Co. said that in the past month the economy has gotten stronger. Consumers have opened their wallets and are spending more money than many thought they would be going into the holiday season. Businesses are continuing to purchase more software and equipment, even after some had predicted that spending would taper off. Inflation has dropped as the price of oil and to a lesser extant gas at the pump has fallen. So full steam ahead for the economy, right? Now quite. Here’s why:
In fact, at the same time the Fed said that the economy was improving this year, it ratcheted back its expectations for the economy next year and beyond. Back in June, the Federal Reserve said the economy could grow as much as 2.9% this year. Today the Fed cut that forecast nearly in half, saying GDP could grow as slow as 1.6% on average in 2011. That drop is perhaps not that surprising given how much weaker than expected the economy has been in the past few months. What was surprising was that the Fed not only lowered its expectations for this year, but for next year and 2013 as well. The Fed predicts GDP could rise as little as 2.5% next year, down from forecast of as much as 3.7% back in June. For 2013, the Fed pulled back its optimistic prediction to a 3.5% rise in GDP, down from 4.2%.
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How can the economy get better and worse at the same time? I think what we are seeing the Fed coming around to a vision of the economy that many are having right now – which is a that we are headed for a cyclical upturn in growth, but not enough to improve the long-term problems that are slowly eroding the U.S.’s ability to grow. Why are we improving now? Perhaps, because the economy can’t stay down for long. Eventually the money accumulating in our collective pockets burns a hole and gets out. We’re not Japanese, afterall. We’re Americans. Our tendency is to spend our money.
But even while the economy improves slightly, it’s not nearly enough to really improve our long-term problems. In fact, the longer we stay at a GDP growth rate of about 2% the worse our long-term problems will become. The longer a person remains unemployed the hard it is for them to get a job. Already, this country is perhaps creating a long-term class of educated, skilled yet permanently unemployed workers. In fact, the Fed today also raised its full employment rate for the economy to 5.6% from 5.4%, meaning there is an additional 0.2%, or about 300,000 people, who will never get a job again no matter how good the economy gets. And all those additional people out of work drag down wages for the rest of us.
The result: A growing wealth gap that is that at the heart of why Washington appears to be stalemated, and unable to do anything, even on things like the national debt, which everyone agrees is a growing problem. Studies have shown that both high levels of national debt and income inequality lead to slower rates of growth for the economy. The result is that unless something happens we may find ourselves trapped in a new economic cycle – one that speeds up, just to slowdown. Goldilocks has put on the emergency break.