According to the Congressional Budget Office, the U.S. economy is running at its full potential, defined as the maximum sustainable growth rate, for the first time in a decade. Most economists agree that an economy’s sustainable growth rate is determined by how many people are working and how productive they are.
It appears that the U.S. economy is currently growing at about a 3 percent annual pace. Some economists do not believe that this rate is sustainable and expect that growth is likely to slip back towards 2 percent over the next several quarters. On the other hand, there are a significant number of economists who believe that a rate approximating 3 percent may be sustainable for some time.
To some extent, this divergence in opinion reflects individual economists’ views with respect to recent tax code legislation.
GDP growth rates are important to investment decisions. The sustainable growth rate represents a mid-point between too slow and too fast. In an economy operating consistently below the sustainable rate, unemployment increases, investment contracts and recession looms. On the other hand, too fast is not healthy either. When the economy grows too fast, it over heats. This typically leads to too much money chasing too few products, services and economic investment opportunities. This typically leads to inflation, higher interest rates and asset bubbles that tend, eventually, to be resolve by a recession, or worse.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA®