The global economy is a soap opera, expect some plot twists

The global economy is a soap opera, expect some plot twists

Poor Jerome Powell. He continues to try to do his job and keep his dignity.

At Wednesday’s press conference, Federal Reserve Chairman Powell was quite clear: He and his colleagues on the Fed’s decision-making Federal Open Market Committee (FOMC) see signs of a weakening economy, but they also see signs of continued economic strength.

It is just too soon to cut interest rates because there is a decent chance that the weakness is temporary and will resolve itself. As Chairman Powell repeatedly put it, there are “crosscurrents.”

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Normally, such a judgement would be the subject of some professional discussion and second-guessing. Market participants eager for a boost might be a bit disappointed, but life would go on. In 2019, of course, nothing is that simple.

Asked whether he worried about being fired, Powell replied bluntly, “I think the law is clear that I have a 4-year term and I fully intend to serve it.”

It is appealing to think that the Federal Reserve should do whatever it can to prolong an economic expansion. However, the signals are usually quite mixed. There are signs that the economy will turn downward, but there are also signs that it is doing quite fine.

The Fed, as well as other central banks, has rarely been able to see through the fog so well as to anticipate a downturn perfectly.

The problem is that premature rate cuts might accelerate the economy too much, setting off a burst of inflation. Later on, we would all pay for the mistake, as the Fed would have to raise interest rates sharply to wring the inflation out of the system.

While trade wars and economic weakness in Europe have gathered more headlines at the moment, the clearer indicators of a slowdown are slow growth in personal consumption expenditures and business fixed capital investment.

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Personal consumption, including all of our normal purchases on the goods and services we need to keep living, makes up about two-thirds of the economy.

If personal consumption chugs along at 2-percent a year, the economy usually looks pretty good. Its growth has slowed a bit so far this year, but the latest data showed a slight uptick.

Business fixed capital investment plays the hare to consumption’s tortoise. In an expansion, businesses rapidly increase their building of new facilities and their purchases of new equipment. But investment can also take a nosedive, leading to a recession.

For example, the near halting of construction of new houses in 2006-07, as housing prices started to crash, led to layoffs, failure to repay loans and, eventually, both a recession and a financial meltdown.

Neither the tortoise nor the hare have stopped entirely at this point. But they both look a little tuckered out after a decade of expansion.

More topical events could either spur our two animal protagonists to greater efforts or cause them to run for cover. Upcoming events include the efforts to get the U.S.-Canada-Mexico trade agreement through Congress, President TrumpDonald John TrumpTed Cruz knocks New York Times for 'stunning' correction on Kavanaugh report US service member killed in Afghanistan Pro-Trump website edited British reality star's picture to show him wearing Trump hat MORE’s upcoming meeting with Chinese President Xi and escalating tensions with Iran.

The members of the FOMC publish their predictions for the course of interest rates. The majority of them now foresee rate cuts during the remainder of this year. These “dot plots” are now part of our common vocabulary. Clearly, the FOMC sees a weaker economy on the horizon.

But it would be a mistake to connect those dots too soon. This soap opera has had plenty of twists and turns. It could be a while until the tortoise and the hare take a recession break, or it could happen sooner than we think.

If this is your kind of soap opera, stay tuned.

Evan Kraft is the economist in residence for the Economics Department at American University. He served as director of the Research Department and adviser to the governor of the Croatian National Bank.