There’s no doubt that the U.S. economy is in a boom. The Conference Board is reporting the highest levels of job satisfaction in more than a decade. This is probably because of a tight labor market — the ratio between the unemployment level and the number of job vacancies is at its lowest level in a half-century:
A broader measure, the prime-age employment-to-population ratio, is back to 2006 levels. Meanwhile, real gross domestic product growth for the second quarter was just revised up to 4.2 percent. Corporate profits are rising strongly. And investment as a percentage of the economy is at about the level of the mid-2000s boom:
Wages are still lagging. But all other indicators show the U.S. economy performing as strongly as at any time since the mid-2000s — and possibly even since the late 1990s.
Which raises an interesting question: Why is this boom happening?
That’s an almost impossible question to answer. Fundamentally, economists don’t know why booms happen. It’s possible that there’s not even such a thing as a “boom” at all — that this is just how the economy works under normal circumstances, when there isn’t a recession or crisis to throw it off its game. But it is possible to identify some factors that might — with the emphasis on “might” — be contributing to the strength of this economic expansion.
The first is low interest rates. The Federal Reserve kept short-term rates at or near zero for almost a decade after the financial crisis, suppressing long-term rates in the process. That in turn lowered borrowing rates for corporations and mortgage borrowers, which tends to juice investment.
Standard macroeconomic theories hold that low rates increase aggregate demand. Those theories also say that when interest rates are low, fiscal deficits provide an added boost to demand, and deficits have been rising as a result of President Donald Trump’s tax cuts:
These are what are known as demand-side explanations. Typically, it’s believed that goosing aggregate demand with fiscal and monetary policy will eventually lead to rising inflation. So far, it has risen very slightly but is far from alarming:
A third demand-side explanation is what John Maynard Keynes called animal spirits, and what modern-day economists call sentiment — potentially random fluctuations in the optimism and confidence of businesspeople and consumers. There is evidence to support this explanation — small business confidence is at record highs, and consumer confidence also is very strong:
A final demand-side explanation is that the current boom is simply the tail end of the long recovery from the Great Recession — consumers and businesses might finally be purchasing the houses and cars that they waited to buy when the recovery was still in doubt. Housing, traditionally the most important piece of business-cycle investment and consumption, is still looking weak, with housing starts below their 50-year average. But business investment might be experiencing the positive effects of stored-up demand.