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.

---

Trading Commodity Futures Using Support and Resistance - Paper Trading

Setting Up a Paper Trading AccountQuestion: I cannot trade with... Read More

Oil and Gasoline Price Uncertainties

The Light Crude Continuous Contract hit an all-time high at... Read More

Day Trading the SP Futures with Initial S/R and the NYSE TICK

For instance, if the market moves up in the first... Read More

Retirement or Financial Freedom?

In the past most people never retired. They died. The... Read More

Coca-Cola - A Value Stock?

There has been much talk lately about Coca-Cola and its... Read More

When Its Too Late to Save for Retirement

You are 55 years old (or somewhere around there) and... Read More

Investigate Before You Invest

"Through wisdom is a house built. And by understanding it... Read More

Quit and Retire Three Years Earlier!

For most people, there is a direct correlation between how... Read More

How to Buy to Let

Find out everything you need to know about buy to... Read More

Online Trading Options Strategies - Rolling

Rolling is defined in options online trading as moving a... Read More

Learn How to Lose and Risk Management

One of the leading traders on Chicago Mercantile Exchange, because... Read More

Annuity Owner Mistakes

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

Poll Names Coin Laundries Best Investment For 2005

According to Morton Pollack, CEO of PWS, The Laundry Company... Read More

Why You Need To Buy and Sell Gold Coins (Part 5)

Grading coinsThe condition of a coin is commonly summarized by... Read More

Investing and Asset Allocation

Sometimes you spend sleepless nights worrying about which stocks to... Read More

Stock Market Money Management Skills

Let's start by saying: You can't be afraid to take... Read More

Why You Need To Buy and Sell Gold Coins (Part 2)

How to Collect Rare Coins For Fun and ProfitTime has... Read More

Choosing A Financial Advisor

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

Basic Options Terms

Options are good investing and speculative instruments. But options terminology... Read More

Asset Allocation: Critical to Your Investment Success

Asset allocation is a critical component of investing success. Both... Read More

Chile Leads the Latin Pack

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

Why the Rich Keep Getting Richer

Rich people: fortunate, lucky, selfish, and arrogant? Or highly educated,... Read More

Forex market offers opportunity and information

The forex market is what is called an international exchange... Read More

How to Invest Overseas - Intelligently!

In recent months, many advisors have talked a lot about... Read More

The Truth About Real Estate Investing - Is It Right For You?

You have probably been hearing, seeing and reading that real... Read More

Investing in New Zealand - Learn how to Find Unique Investment Opportunities

Investing in New Zealand might be much easier than investing... Read More

Mutual Fund Selection Made Simple By Indexing!

Non-indexed mutual funds try to keep it secret that actively... Read More

Stock Market Retirement Investment Plan

For a successful retirement investment plan to work in the... Read More

Bearish or Bullish?

If you are interested in stock investing and the stock... Read More

Variable Annuities

You know all the articles you read about annuities that... Read More

Creating a Financial Future - Putting Your Plan Into Action Part 1

This column has previously discussed "picturing the future that we... Read More

Overbought/Oversold

Has your broker ever told you that a stock is... Read More

Remembering TEOTWAWKI and Learning from It

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