US Economy: Goldilocks or Perfect Storm?

The US economy is operating on all cylinders, and depending on who you ask, it’s either a Goldilocks economy or — if you take a longer-term perspective — the calm before the storm.

In the current economic environment, where expansion is steady, inflation remains in check and unemployment is at multi-year lows, there’s plenty to cheer. Indeed, US households are experiencing a Goldilocks environment where conditions are neither too hot nor too cold, according to US Fed San Francisco President John Williams.

“I feel this is pretty much a Goldilocks economy. I see this as all pretty positive,” Williams is quoted as saying.

Last week’s headline unemployment number of 3.9% in April coupled with modest wage inflation cemented the Goldilocks conditions, fueling the belief that the Fed will maintain its plan to lift short-term interest rates twice more in 2018.

Meanwhile, Fed Reserve Chairman Jerome Powell on Tuesday suggested that the markets including the U.S. and emerging markets should not be blindsided by the expected rate hikes. Powell calls it “normalization”, adding that monetary policy in the U.S. “should continue to prove manageable” for emerging markets.

Meanwhile, oil prices are hovering near $70 per barrel, which is another bullish sign for the economy.

Dimon’s Economy

While economists in various circles are painting an optimistic picture about economic expansion and inflation moving toward the Fed’s 2% target, it’s not a big shock that JPMorgan’s chief Jamie Dimon, who infamously denounced bitcoin and banned investors from making cryptocurrency payments via credit card, is thinking about the next recession.

Dimon told Bloomberg: “Somebody asked me once, ‘what are the odds of a recession?’ I said it’s 100%. The question is when.”

To be clear, Dimon doesn’t see another recession of 2007 proportions repeating itself. Things are a lot different this time around, as he pointed out –

  • More people are joining the workforce
  • Housing inventory is low
  • “Much less leverage in the financial system” now versus before
  • Banks are holding two-times as much capital + liquidity
  • Consumer balance sheets are stronger

But when you take a step back, you see that 20% economic growth has unfolded over a nine-year period, which he said explains the tepid wage growth and just wasn’t good enough. “It should have been 40% over a shorter time period,” Dimon told Bloomberg.

As a result, he warns not to get too comfortable.

“America looks pretty good. … It looks like this [economic growth] may have legs to go. Maybe a year, maybe two, maybe more.”

In the interim, he hopes the US economy can maintain economic expansion of higher than 2%. Meanwhile, he points to other economies of the world that are doing better, including Japan, where economic recovery is under way, Brazil and Europe.

As for America, if inflation proves to be rising at a faster rate than anticipated, it could prompt the Fed to raise short-term interest rates more than expected.

Featured image courtesy of Shutterstock.

Gerelyn has been covering ICOs and the cryptocurrency market since mid-2017. She's also reported on fintech more broadly in addition to asset management, having previously specialized in institutional investing. She owns some BTC and ETH.