The Perfect Economy?

The U.S. economic data reported this week showed strong output growth with tame inflation. Industrial Production expanded at about 1% in June, three times greater than expected, while both the June Consumer and Producer Price Indices were unchanged. Also, the June Capacity Utilization rate rose to 80.0%, and the June Unemployment Rate fell to 5.0%. The June data generally show there is neither strain nor slack in the U.S. economy. Therefore, the U.S. economy is expanding at an optimal rate.

It seems, the "Goldilocks" economy (of neither too hot nor too cold) may continue for several months. The longer-term trend has shown slowing output growth with rising inflation (i.e. stagflation). In 2003 and 2004, the U.S. economy expanded at about 4.0% real growth, while inflation rose from 1.6% to about 3.0%. Sustainable growth, which is optimal, is 2.7% real growth. So far in 2005, output growth has slowed to just above 3.0% real growth, while inflation has stabilized or fallen somewhat.

U.S. output growth and inflation have been quite impressive, over the past few years, after the bubble boom in the late '90s (where resources were under great strain) and the shallow recession in 2001 (during of a massive "Creative-Destruction" process, which made the U.S. economy more efficient). The U.S. economy owes a great debt (no pun intended) to the skill of the U.S. Federal Reserve (Greenspan & Company) for smoothing-out the business cycle, and to a lesser extent the (continuing) stimulative fiscal policies of the Bush Administration.

Future inflation is both actual and expected inflation. The U.S. Federal Reserve has done a masterful job lowering inflation expectations, through a combination of actual tightening and "jawboning." However, to keep future inflation in check, the Fed may need to tighten (at a "measured pace") at each FOMC meeting this year, because monetary policy is still quite accommodative, and the lags in monetary policy force the Fed to work in the future economy.

NAIRU (the Non-Accelerating Inflation Rate of Unemployment) is estimated to be 5.0%, which is where the Unemployment Rate fell to last month. Also, the Capacity Utilization Rate rose to 80%, and over 80% is an indication of rising or accelerating inflation. Moreover, the output gap (between potential and actual output) has closed, taking the slack out of the economy. So, the U.S. economy is "perfect." To maintain the optimal growth rate, the Fed will need to correctly anticipate the future economy and make the appropriate adjustments. The Fed has done an excellent job bringing the economy up to "perfection." However, it may need to continue tightening until monetary policy reaches a neutral stance, and then tighten further to preempt inflation and maintain price stability.

Arthur Albert Eckart is the founder and owner of PeakTrader. Arthur has worked for commercial banks, e.g. Wells Fargo, Banc One, and First Commerce Technologies, during the 1980s and 1990s. He has also worked for Janus Funds from 1999-00. Arthur Eckart has a BA & MA in Economics from the University of Colorado. He has worked on options portfolio optimization since 1998.

Mr Eckart has developed a comprehensive trading methodology using economics, portfolio optimization, and technical analysis to maximize return and minimize risk at the same time. This methodology has resulted in excellent returns with low risk over the past five years.

---

Effective Advice For A New Generation of Investors

CATCHING A FALLING KNIFEOne of the most common mistakes made... Read More

Short Selling for Investors

Shorts. Let's see. If there are shorts there must be... Read More

The Power of Small Numbers: Trading Success is Based on Consistency, Not Home Runs

Online trading is so seductive - just sit, click, and... Read More

The Biggest Oil Opportunity in the World ? And How You Can Profit From It

Where is the second biggest deposit of oil reserves in... Read More

Find Your Investing Soulmate on the Jersey Turnpike

As a followup to a previous column, "Irreconcilable Differences," I... Read More

Choosing A Financial Advisor

With so many financial advisors trying to woo you with... Read More

To Retire Rich, Save and Invest Early

If you want to retire rich, start saving investing early.... Read More

Value Investing

By definition, value investing is the process of selecting stocks... Read More

Part II of Day Traders and Swing Traders and Options? Maybe!

Before every protective put trade it is possible to calculate... Read More

The Three Legged Stool

My paternal grandparents were born near Lake Como, Italy. My... Read More

A Safe Port For Mutual Funds But Not You!

Soft dollars, a form of legal kickback, is a sly... Read More

Remembering TEOTWAWKI and Learning from It

Its only been about 5 years since we had major... Read More

Investing & Online Stock & Share Trading- The Stock & Share Markets are Booming But Be Warned

I had the pleasure of being invited on a friend's... Read More

Annuity Owner Mistakes

Okay, so I can tell you I have sat in... Read More

Critical Investors Business Daily Responsibilities - If not Followed Could Cost You Millions!

When thinking about the investors business daily responsibilities in today’s... Read More

Press Release Scams and Successes: Reading Between the Lines

Press releases are a means through which companies can keep... Read More

Annuity Investment Guide

While there is not a lack of information on annuities,... Read More

Can Your Annuity Do This?

Okay, so I can tell you I have sat in... Read More

Options Education: Financing the Calendar!

As a trader, one of the key things that I... Read More

When It Comes To Investing, Asking The Right Questions Can Help You Make The Right Decisions

Are you ready to open your pathway to financial independence?Well... Read More

Powerful Options Basics Lessons Improving your trading in 180 days.

An option is a traded security that is a derivative... Read More

How to Terror-Proof Your Money

"To drift is to be in hell, to be in... Read More

Should You Put Your Annuity in an IRA?

Let me start by answering that question...if an annuity fits... Read More

Stocks, Oil, and Bonds

A barrel of oil bounced to over $60 Thu, which... Read More

Annuity Investment - The Whole Truth

Do you ever feel like you haven't been told the... Read More

Better Investing Made Easy

If there were one piece of advice that an investor... Read More

Retirement Plan Considerations Cheat Sheet for Small Business

RETIREMENT PLAN CONSIDERATIONS are something every small business person needs... Read More

Selecting Rules for Investing and Trading

There are three important differences between investing and trading. Overlooking... Read More

Chile Leads the Latin Pack

Everyone's talking about China. Don't miss the opportunities in the... Read More

The Dreaded Direct Question

(Please have a glass of water within reach before reading... Read More

The Benefits of Laddering Your CD Investments

If you've decided to stock some money away in a... Read More

Buy: Hold: Sell: Jump

I'm sitting here at my computer desk with a cup... Read More

Can Your Annuity Do This?

Many people buy annuities according to their agent's recommendations. However,... Read More