Detroit Association of Business Economists – Economic Update

By Paul Traub

On February 19, 2015, the Detroit Association of Business Economists met at the Detroit Branch of the Federal Reserve Bank of Chicago to hear Chicago Fed senior economist and economic advisor William Strauss discuss the U.S. and Midwest economy. It has now been over seven years since the U.S. plunged into its worst recession in decades and there has been some debate recently as to how well the economy is currently performing. Some economic indicators that suggest the recovery is strengthening, but others imply there is still a lot of room for improvement. Following the January 28, 2015, meeting of the Federal Reserve Open Market Committee (FOMC), the Committee released a statement indicating that between December 2014 and January 2015:

1. Economic activity looked to have expanded at a solid pace.
2. Labor market conditions continued to improve with strong job growth and diminishing underutilization of the labor force.
3. Household spending rose moderately with purchasing power being boosted by falling energy prices.
4. Business fixed investment continued to advance.

However, the FOMC also noted the following less favorable indicators:

1. The recovery of the housing market remains very slow.
2. Inflation continues to be below the Committee’s long-run objective of 2%, a level of inflation that is consistent with sustainable positive economic performance.
3. The share of those unemployed more than six months remains at 31.2%, well above the pre-recession long-run average of 12.8%.
4. The number of employees working part-time for economic reasons still remains elevated.
5. And about 1.4% of the fall in the unemployment rate can be explained by workers that have left the labor force because they can’t find work or have become discouraged looking for a job.

Even in the face of this less than positive news, Strauss said that recently he has been hearing concern from some economic analysts that given the current length of this recovery, 68 months and counting, the U.S. economy could be close to heading into its next cyclical slowdown. Strauss went on to explain that even though the average economic expansion since the 1960s has been roughly 72 months, it is not the length of the recovery as much as other unexpected circumstances that predict the end of an economic expansion. For example, the 2008 recession didn’t start because the economy had been expanding for 73 months and just ran out of momentum; rather it was the result of a financial crisis that was preceded by the bursting of a housing bubble. So even though the most recent economic expansion looks to be very close to the average of past expansions, there is no reason to believe the U.S. economy will suddenly just run out of steam. Strauss went on to say that the manufacturing sector continues to expand nicely, business investment continues to advance, and the consumer looks to be benefiting from lower energy prices. He also pointed to forecasts from the consensus of the Blue Chip Economic Indicators and the FOMC for the U.S. economy to continue to grow at about 2.8% to 2.9% over the next two years, a pace slightly better than its long-run potential. For more detailed information and to see Strauss’s entire presentation, click here: Presentation to the Detroit Association of Business Economists.