Recovery Is Too Slow for Comfort
The ongoing U.S. recovery might lull some into forgetting about the risks its lack of momentum presents: The longer the economy just muddles along short of escape velocity, the greater its vulnerability to external shocks.
The latest economic news is telling the same story we've heard for years now: The economy is growing and healing, and it would have done even better if it weren’t for some unanticipated development (the weather being the issue this time around). In reality, however, its underlying strength is insufficient to achieve the "liftoff" needed to deliver enough high-quality jobs and the durable expansion the country is capable of (and needs).
Yesterday's unexpectedly low estimate for output growth in the first quarter of this year -- an annualized 0.1 percent, down from 2.6 percent in the prior quarter -- was balanced by more concurrent employment and business indicators suggesting that the unseasonably cold winter is giving way to a more active spring and summer.
Meanwhile, yesterday’s Federal Reserve policy statement, scarcely changed from the prior one, signaled more of the same. The central bank reiterated a policy approach that is essentially on autopilot, with a regular $10 billion reduction in its monthly bond buying and short-term interest rates floored near zero.
None of this is likely to change absent a significant catalyst. Companies have the wallet to materially improve the economic outlook by investing more in facilities, equipment and hiring. They are unlikely to do so without a more comprehensive policy approach, one that goes well beyond what the Fed has been providing markets though its extraordinary bond-buying program.
To enable a stronger and higher-quality recovery, the government needs to do its part. Greater clarity on corporate tax reform and increased infrastructure spending, for example, could improve the environment for business investment and, more generally, help generate the income households need to reduce still-heavy debt loads.
Unfortunately, the vast majority of the government’s economic policy apparatus is essentially sidelined by congressional polarization, and the Fed has neither the tools nor the authority to compensate and deliver on the required stimulus and structural reform. This leaves the U.S. for now in a low-level economic and policy equilibrium, vulnerable to adverse noneconomic factors such as bad weather and Ukraine’s geopolitical crisis.
In an ironic sort of way, it may have been more beneficial for all over the long term if either yesterday’s economic data or the Fed’s pronouncements had been shocking enough to rouse Congress to action. Instead, the economy remains in the muddled middle, where investors' perception of a range-bound world encourages greater risk-taking as they stretch further and take on more leverage to meet their return targets. At some point, however, a proper economic recovery will be needed to validate a growing number of market valuations.
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Mohamed Aly El-Erian at firstname.lastname@example.org
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