It's Just One Data Point
If you wonder why economic headlines leave average Americans confused and anxious, consider the following example. On Thursday, March 30, the Bureau of Economic Analysis (BEA) reported that the economy grew at a better-than-expected 2.1% in the fourth quarter of 2016, propelled by a strong 3.5% increase in consumer spending. The next day, Commerce Department data showed that while incomes and consumer confidence are rising, February 2017 showed the smallest gain for consumer spending in 6 months.
Is consumer spending, a major driver of the economy, actually rising or falling? Is economic growth increasing, as President Trump promised?
The truth is that both values fluctuate, and today's 24/7 coverage leads to over-analysis of individual data points. The stronger growth from Thursday refers to a change from the previous estimate to the final Q4 version. Friday's data is a monthly estimate, while Thursday's report is quarterly. Both fall within typical variations.
To gain perspective on the true state of our economy, it's important to look at longer-term trends.
Is 4% in the Future?
President Trump's goal of 4% annual economic growth seems like a tall order until you realize how stagnant our economy has been in relative terms. The historical average in GDP change from 1947 to 2016 is 3.22%, but since 2006 annual growth has failed to crack the 3% mark – the longest stretch since the government began calculating GDP changes in 1930.
Trump is fully aware that economic anxiety helped to elect him. Rest assured he will be focused on achieving solid economic growth. That's why taxes and infrastructure spending are probably next on his priority list. The long-term merits of his plan are arguable, but in the short term, Trump's plans are likely to provide an economic boost.
Can the Trump administration rebound from the health-care missteps? Expect another Battle Royale with the Congress, but it's more likely a compromise deal will be reached, especially on infrastructure. Legislative success in these areas should spur growth and in turn, change one factor that affects you directly: interest rates.
Watch Interest Rates
Like our relatively slow growth, interest rates set by the Federal Reserve are also in a long period of uncharted territory. For seven years, interest rates were near zero in an effort to provide economic stimulus. Recent interest rate changes have only brought us to the 0.75%-1% range. For perspective, consider that the average Fed rate since 1971 is 5.81%.
The Fed intends to continue slowly raising interest rates to restore normality without spooking stock markets, which means the interest you pay on loans and credit cards will rise as well. Greater economic growth will likely raise inflation risks and cause the Fed either to raise rates more often or by a higher percentage, further increasing the interest you pay on debt.
Does this mean you should root for lower economic growth? Of course not — the same forces that raise inflation also tend to raise your wages. If companies have to pay more in labor costs, their product prices tend to increase and are passed on to consumers, creating inflation. This is a very simplistic generalization, but the relationship holds reasonably true.
That's why February's numbers, which show rising incomes and a similar increase in inflation but slower spending, raise concern. Slowing personal consumption (demand) should cause businesses to slow output and drag economic growth downward.
In times of higher interest rates, you should make an even greater effort to take control of your debt. Limit your amount of debt, and, when possible, make sure the debt that you do have provides value — for example, mortgage debt that provides home equity as you pay it off.
Daily headlines and politics aside, the odds are good that we'll see a level of short-term economic growth we have not seen in recent times. Thus, it's important to stick to a budget and restrain borrowing to avoid paying more in interest charges. It's also wise to maximize your credit score so when interest payments are unavoidable (such as with a mortgage), your sterling credit will warrant the best rate available. You can check your credit score and credit report for free within minutes using Credit Manager by MoneyTips. If you are ready to buy a home, you may want to act now while interest rates stay in historically low territory.
As for daily economic headlines, take a deep breath and remind yourself: it's just one data point. It had better be a staggering change against long-term trends to warrant your concern.