It’s hard not to feel buoyant about the U.S. economy. On Wednesday morning, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite all reached new record highs. In an interview at the World Economic Forum in Davos, Switzerland, JPMorgan Chase boss Jamie Dimon said that U.S. economic growth could reach 4 percent this year. And Goldman Sachs has projected that 2018 will witness a “renewed acceleration” of wage growth.
True, the labor-force-participation rate among men aged 25 to 54 remains a serious and stubborn concern, but it just hit 89 percent for the first time since 2011. Meanwhile, the unemployment rate among black Americans has hit an all-time low.
Surveying the global economic landscape, the British economist Jim O’Neill, former chairman of Goldman Sachs Asset Management, sees tentative signs that “productivity growth will accelerate in a number of places,” including the United States and the United Kingdom. “As long as financial conditions don’t tighten excessively as a result of today’s cyclical strengthening,” writes O’Neill, “global economic performance for the rest of this decade could end up being more robust than anyone would have imagined just a few years ago.”
The biggest threat, as I noted earlier this month, may come from a stock-market drop. “An excessively easy monetary policy has led to overvalued equities and a precarious financial situation,” argues Harvard economist Martin Feldstein in the Wall Street Journal. “The Fed should have started raising the fed-funds rate several years ago, reducing the incentive for investors to reach for yield and drive up equity prices. Since it didn’t do so, the Fed now faces the difficult challenge of trying simultaneously to contain inflation and reduce the excess asset prices — without pushing the economy into recession.”
Speaking to the Telegraph in Davos, Canadian economist William White issued an even stronger warning: “All the market indicators right now look very similar to what we saw before the Lehman crisis, but the lesson has somehow been forgotten.”
White has more credibility than most economists on these issues, because he warned about the U.S. housing bubble and other global financial excesses for years prior to the 2008 crisis. Currently chairman of the OECD’s Economic and Development Review Committee, he previously served as chief economist of the Bank for International Settlements, which is often called “the central bank for central banks.”
Whether or not White and Feldstein are correct about the present financial environment, their messages are worth pondering amid this moment of widespread economic exuberance.