We are now well into 2019’s first quarter, and what I, among others, have called the “Goldilocks” — or just right — economy seems to be a thing of the past. Writing from January’s World Economic Forum in Davos, Switzerland, the Wall Street Journal’s Greg Ip surmised, “A year ago the world looked like it would finally return to the boom times it enjoyed before the global financial crisis. Now the boom may be over before it even started.”
It was only September when Kimberly Amadeo wrote happily in The Balance, “The GDP growth rate is expected to remain between the 2 percent and 3 percent ideal range. Unemployment is forecast to continue at the natural rate. There isn’t much inflation or deflation. That’s a Goldilocks economy.”
In some ways, things seemed to be even better than “not too hot” and “not too cold.” Real GDP growth had accelerated from 1.6 percent in 2016 to 2.3 percent in 2017, and was expected to hit 3 percent in 2018. Consumer confidence surveys showed strong readings for the future.
We seemed to be on a roll, but three bears came home and chased Goldilocks away: trade uncertainty, monetary policy uncertainty, and the government shutdown. These dark clouds in an otherwise buttermilk sky — if you’ll excuse a second metaphor — do have a silver lining in that they are of our own making and therefore can be temporary.
Trade disruptions and related uncertainty have delivered major disturbances to farming and parts of the manufacturing economy, both of which confront higher tariff-induced input prices and diminished Chinese markets due to retaliatory tariffs.
Chinese and U.S. trade negotiators are at work as I write this. They are attempting to settle differences in time to avoid a March 1 increase on U.S.-imposed tariffs. If the two sides fail to reach agreement, our 10 percent tariffs on some $200 billion in annual purchases of Chinese goods will rise to 25 percent, and the trade bear will really growl.
As for the monetary bear, there is no way to know at this point if the Federal Reserve’s actions over the next 12 months will be “just right.” But the recent announcement of no interest rate increase following the Fed’s January meeting, and discussions that imply revised thinking and an openness to lower interest rates in the future, suggest this bear may become tamer.
Finally, the 35-day government shutdown had both short-and long-term effects. On the short side are losses in gross domestic product growth generated by lost income and associated spending by the more than 1 million affected government employees and contractors. Delays in the provision of government services, such as patents, passports, Food and Drug Association’s drug approval, Federal Trade Commission merger agreements, and Environmental Protection Agency construction permits, will generate another ripple of GDP losses.
With three weeks to avoid a second shutdown, congressional negotiations about funding the border wall President Trump insists upon are now underway. The shutdown bear is still growling, but the voice may be getting weaker.
The bears returned, and though Goldilocks escaped, she took our 3 percent GDP growth economy with her. The question is whether policymakers will provide enough stability for her return. I don’t think so, even though we probably won’t experience a full three-bear recession, either.
We can and should do better than this. The longer, more corrosive effect of the three bears we’ve created is real but far more difficult to measure.
Postponed investment and other economic activities that rely heavily on government permission and services have suffered. Like it or not, ours is a government-intertwined economy. When the permit-issuing agencies are closed, affected activity moves to a standstill condition. There is no back payment for lost opportunities.
If angered, any one of these three bears — trade wars, Fed uncertainty, and shutdowns — poses a threat to an otherwise happy situation. Two or three of them growling in tandem could push the economy into a mild recession. Until December 2018, strong GDP growth, the lowest unemployment rate in almost 50 years, and a stable price level were just right. Let’s not poke the bears.
Bruce Yandle is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a distinguished adjunct fellow with the Mercatus Center at George Mason University and dean emeritus of the Clemson University College of Business and Behavioral Science. He developed the “Bootleggers and Baptists” political model.
