The U.S. economy is stronger than it appears, and that is why interest rates have begun to rise. The economy had shifted into a higher gear and didnt need as much help as it did earlier on. Some participants figured that the economy must have been stronger than they realized, although they were in the minority.
After all, the unemployment rate was still high, even though it was a half-point below its year-ago level. The percentage of the unemployed who had been out of work for 27 weeks and over was still higher that it was four years earlier. Adding in the underemployed and those who dropped out of the labor force made things even worse. For its part, business was concerned about a lack of demand, and in some cases, insufficient pricing power. Nevertheless, the markets got jittery. Stocks tanked, while bond yields jumped. Others pointed to the weak job figures as a sign that stimulus would remain. All well and good, but if you drill down, you will find an economy that is doing a lot better than the conventional wisdom believes. Lets start with top-line growth: It has averaged about 2.5% since this recovery began, back in the middle of 2009. Considering that fiscal policy was only slightly stimulative at the outset but soon turned restrictive, this is not bad.
The Congressional Budget Office estimates that 1.5 percentage points of growth has been lost because of fiscal restraint. Add this to 2.5% and you get 4% growth, a pretty decent number I would say. Where is such growth coming from, you might ask? First and foremost, there is housing. New-home construction and sales are jumping, as are prices. The nations biggest industry, housing, also boosts sales of home furnishings and other consumer goods when it is going up. Another big-ticket item, motor vehicles, is also doing well. This includes not just cars, but also SUVs and trucks. Energy and health care are also adding to the totals.
As long as the economy continues to improve, you have to plan on interest rates going up. This is not all that bad. Just ask anyone on a fixed income trying to live off their savings.
