The Dangerous Corners of the U.S. Economy Actually Look Pretty Sound
(Bloomberg Opinion) -- We can’t all be Nebraska.
The state’s unemployment rate is persistently lower than the nation’s as a whole, avoiding the booms and busts observed in other states and nationwide. Over the last 30 years, Nebraska has never had an unemployment rate above 5 percent. In the 1990s, its unemployment rate never exceeded 3 percent for a single month. By contrast, California’s unemployment rate was as high as 12.3 percent in 2010 and is as low as 4.1 percent now.
Nebraska was able to walk this steady course because it was not an epicenter of dot-com investment or subprime home lending. It’s not a strategy that the U.S. economy can emulate; the nation as a whole doesn’t want to miss out on every boom. But it would certainly be helpful to have some sense of when each boom is about to go bust. Maybe Nebraska offers a clue.
Consider the geographic communities and sectors of the economy where booms and busts have actually happened, and what conditions were in place when those experiences played out. We’ve seen booms and busts in the energy sector, in housing, on Wall Street, in Silicon Valley and in manufacturing. In all of those sectors and busts, low unemployment rates typically coincide with the booms, but so too do excess investment and speculation, excess leverage, and bidding wars to secure resources.
So there’s a better way to think about overheating risks when inflation is not worrisome but the unemployment rate is low, as it is now. Pay closer attention to the sectors of the economy where we’ve historically seen busts to see if some of the hallmark signs of excess exist.
And for the most part, those sectors aren’t showing excess levels of investment or speculation. The oil industry already had its bust a few years ago. While the housing industry appears to have hit a bit of a soft patch lately in response to rising interest rates and perhaps some of the impacts of the Tax Cuts and Jobs Act, we’ve seen neither excess housing construction nor excess mortgage borrowing over the past decade with memories of the financial crisis still so fresh. While the manufacturing sector is strong, it’s mostly in response to strong economic conditions rather than some unsustainable boom in a particular industry. Technology is the one area of the economy that has shown signs of overheating, though unlike during the technology boom of a generation ago, today’s companies generally have real business models and are less likely to vanish overnight.
Low unemployment in the context of an economy without destabilizing levels of financial leverage or investment should give the Federal Reserve the courage to let the economy run hotter than it might if that leverage or excess investment existed. It may lead to somewhat higher inflation than we’ve seen in the past couple cycles, but so long as inflation expectations stay contained, that shouldn’t concern a Fed that claims its inflation target is symmetric. This economic cycle will end someday, but it may continue longer than most think.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Conor Sen is a Bloomberg Opinion columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.
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