A Second Wind
One of the most astonishing economic miracles I have seen in my 30-plus years of professional investing is the possibility of our economy receiving a second wind.
That’s right! Considering the length of this economic recovery compared to past recoveries, this qualifies as a growth miracle. [i]
To appreciate this growth miracle, you need to understand how strong and deep this economic recovery really is. Look no further than the following unemployment data. [ii] [iii] [iv] [v]
The civilian unemployment rate of 3.9 percent just reached a 49-year low, and all the other groups above are showing significant improvement as well. Additionally, by looking at the trajectory of wages within each of these groups, you get a clear idea of the depth and strength of this economic recovery. [vi] [vii] [viii]
Furthermore, wage growth for less educated individuals is outpacing wage growth for each of the other cohorts. On top of this, workers as a whole are experiencing real wage growth in addition to saving more. [ix] [x]
To say all the employment data above is good would be an understatement. Normally, this would suggest the Federal Reserve will kill the golden goose as they have in the past by raising interest rates to combat inflation. Ironically, the Fed is on a month-long listening tour to see if there is room to raise its existing inflation target above the 2 percent benchmark. While this is preliminary, if the Fed does increase its inflation target, that could certainly suggest we’re in for lower interest rates.
“We’re trying to think of ways of making that inflation 2 percent target highly credible, so that inflation averages around 2 percent, rather than only averaging 2 percent in good times and then averaging way less than that in bad times… [However,] I would just urge great, great caution on this for many, many reasons, not the least of which for whatever period of time the Fed decided it would exceed the goal so that it averages the goal, first of all during that period of time presumably you don’t have price stability.’’
– Jerome Powell, chairman of the Federal Reserve [xiii]
These comments are especially timely for investors, now that we’re nearing the Fed’s 2 percent target and inflation continues to trend higher. [xi]
Certainly, a higher inflation target and lower interest rates by the Fed could add more fuel for the consumer in the form of real wage growth, improvements in the savings rates, and an increase in spending. [xii] [x]
If there is ever a chance for our economy to get a second wind, raising the Fed’s target on inflation could certainly be a major catalyst.
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Tim Phillips, CEO, Phillips & Company
Robert Dinelli, Investment Analyst, Phillips & Company