Jebaraj describes the ‘Goldilocks’ economy

UA Walton College economist Mervin Jebaraj says the U.S. economy is not too hot and not too cool; it’s transitioning from high inflation and a near recession at just the right temperature.

“We’re going to call this the ‘Goldilocks’ economy. We have inflation finally cooling quite significantly anyway, and the economy, in spite of these fast pace of interest rate increases, leaving us at somewhat historic highs of interest rates here, in spite of all of that Federal Reserve action trying to cool the economy, the economy will not cool down, right?” he said.

Jebaraj, who appeared on this week’s edition of Talk Business & Politics, noted that consumer spending remains strong. He also said last week’s GDP reading of 2.4% was stronger than expected and points to another important driver of U.S. economic health.

“If you look at the components of GDP, what really pushed GDP up this quarter wasn’t trade, wasn’t imports or exports, it wasn’t inventory adjustments from businesses, but really was driven by consumer spending, by business investment and some government spending as well,” he said.

“On business investment, a lot of that has come in construction of new manufacturing facilities. And all of this construction of new manufacturing facilities are basically in facilities that are investing in electric vehicles, electric battery technology, chips manufacturing, all of those things that are driven by historic federal government expenditures through the bipartisan Infrastructure law, through the CHIPS Act, through the Inflation Reduction Act, all of which had significant increases in federal government spending that boosted domestic manufacturing in these particular sectors,” Jebaraj added.

Last week, the Federal Reserve Bank raised key interest rates another quarter point and kept their options open to another hike later this year. Inflation has cooled into the 3% range, and Jebaraj said it’s becoming increasingly likely that it will be early next year before inflation meets the Feds’ target of something in the 2% range.

“I think, overall, given the current composition of the Federal Reserve Open Market Committee that makes these decisions, I would guess that a good number of them are thinking that they will hit their inflation target maybe not this year, but next year. There are certain people on there that think that we should get there a lot faster, but that would come at the expense of economic growth,” he said. “So given the incredible pace of growth in the U.S. economy, the historically low unemployment rates, continued increases in job growth, high labor force participation rates, high wage growth, which is what we’re getting these high labor force participation rates, I don’t see a recession anytime this year.”

You can watch Jebaraj’s full interview in the video below.