Boston Fed expert says economy on solid footing, sees moderate growth in 2020
Cooper: uncertainties outweighed by favorable domestic economic conditions
The U.S. economy is on sound footing and looks likely to overcome various risks – including uncertainty about the coronavirus – to see moderate growth in 2020, according to Daniel Cooper, an economist at the Federal Reserve Bank of Boston.
Cooper told business leaders Wednesday at the Worcester Business Journal’s annual Economic Forecast Forum that forecasters expect unemployment to decline somewhat further this year, while inflation is expected to be slightly below the Federal Reserve’s 2 percent target.
Meanwhile, Brexit and the recent U.S. trade deals with China, Canada, and Mexico have decreased economic uncertainty. These factors, combined with strong consumer spending (which makes up about 70 percent of the economy), are creating a positive outlook.
“Going forward, we can expect that moderate economic growth is going to continue,” Cooper said. “Why do we think that? Well, one of the main reasons is that the fundamentals of consumer spending … remain quite strong.”
Optimism is high, and market worries about the coronavirus appear short-lived
During his presentation, Cooper highlighted recent positive data on residential investment, along with favorable domestic trends that should support continued strong consumer spending growth, such as continued strong vehicle sales. He also cited elevated levels of consumer sentiment and gains in household net worth relative to income, which is near its all-time high.
“The way to think about this is people tend to spend more when they are more optimistic and feel wealthier,” Cooper said.
Cooper noted fears about the coronavirus rattled financial markets in late January and early February. But the initial fears subsided, and while uncertainties related to the virus’s effects remain, forecasters generally don’t see much of an impact on the domestic outlook. “The market has sort of shrugged all this off to a certain extent,” Cooper said.
The combination of low inflation and tight labor markets remains puzzling
Current conditions do hold “a bit of a puzzle,” Cooper said, – inflation below the Fed’s 2 percent target (inflation was about 1.6 percent at the end of 2019) despite persistent low unemployment. Typically, when more people are employed, it increases demand for goods and services, so prices increase more rapidly. But that’s not happening yet. Forecasters predict that inflation will be at or near the Fed’s target this year.
Cooper said wage growth is relatively slow given the tight labor market and does not appear currently to be putting much upward pressure on prices. He also said “inflation expectations” have been at a near-constant 2 percent since the late 1990s, and that steadiness helps anchor actual inflation. He noted that when the unemployment rate was at a similar level in the late 1960s, inflation increased somewhat rapidly after being “subdued” for an extended period. At that time, however, inflation expectations rose in conjunction with the increasing prices, reinforcing the rise in inflation.
There’s a good reason the “inverted yield curve” may not be a recession predictor this time
Cooper also addressed the “inverted yield curve,” which has occurred twice in the last year – once from May to early October, and then again very briefly this year when worries initially intensified about the coronavirus. An inverted yield curve occurs when long-term bonds pay out less interest, or yield, than short-term bonds. This is unusual because long-term bonds normally pay out more, since they lock up an investor’s money for a greater amount of time.
Historically, inverted yield curves have been good predictors of recessions. But Cooper said a key difference this time is that monetary policy is “accommodative,” meaning policymakers are still trying to stimulate the economy by keeping interest rates relatively low to make borrowing cheaper. In comparison, monetary policy was quite “restrictive” when the yield curve inverted prior to the previous three recessions. Cooper said forthcoming research by himself and two Fed colleagues indicates that the stance of monetary policy – whether it is restrictive or accommodative – matters when predicting the likelihood of a future economic downturn.