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A Goldilocks Economy

Sigma Investment Counselors

August 25, 2017

According to Wikipedia, a Goldilocks economy is one that is not too hot or too cold, in other words, sustains moderate economic growth, and has low inflation, which allows market-friendly monetary policy.

Where are we now?

Economic growth, during the last several years, as the economy recovered from the severe decline during the “great recession”, has been generally considered to be moderate, or even somewhat lackluster, and below the rate of gain during previous recovery periods.

The most recent employment report (July 2017) calculates wage growth for the 12 months ended July 31, 2017 at 2.5%.  While it is difficult to determine what level of wage growth is ideal, the Fed seems to be leaning toward a 3.5% annual increase as a reasonable target.

It may be more appropriate to consider wage gains in the context of inflation.  Recent inflation data suggest that the current rate is on the order of 1.5%.  Theoretically, wage gains of 3.5%, with 2.5% inflation, should be the economic equivalent, to workers, of 2.5% wage gains and 1.5% inflation.  On the other hand, higher wage gains, matched to higher inflation rates, could trigger a move to raise interest rates in an effort to reign in an economy that might be accelerating too rapidly.

Investors may want to consider that an economy with relatively, moderate economic growth, low wage gains and inflation expectations could serve to moderate pressure to increase interest rates and maintain stability in equity markets.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®

 

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