Economic Waves

Sound waves are an interesting phenomenon.  They start out from a catalyst which vibrates a medium through which they travel.  For instance, clapping hands vibrate the air, changing its density and pressure as they travel away from the hands.  The volume, pitch, and speed of sound are all dependent variables.  For instance, the more energy that goes into a clap, the louder it will sound.  The pitch is a function of the wavelength, so a child’s voice has a higher pitch than most adults because the vibrations of a younger person’s vocal cords are more frequent than those of their elders.  Finally, the pace of travel is dependent on the medium the sound moves though.  Sound travels slower through water than air for instance.

Economies have wave-like characteristics too.  Economic energy in America can move up and down, like a volume control.  When things are running smoothly, it shows up in the nation’s gross domestic product (GDP) statistic as a higher-than-average figure.  When things are less robust, the volume can feel quiet.  Sometimes there is discord in the economy, periods when only certain industries are performing well (e.g., soup makers in period of distress).  But when there is more evenly distributed growth, the hum of the economy is more harmonic.

The medium the economy’s waves move through can change viscosity.  It’s like going from air to water.  For instance, when the Federal Reserve wants to speed things up, they’ll change the atmosphere to something thinner.  They hope to do this by lowering interest rates, often using other forms of accommodation, many of which have been dreamt up since the Great Recession.  Once America’s economy gets overly heated, they begin raising rates to cool activity down a bit.

Currently the Fed has been on hold for a few months, not changing policy and therefore leaving the atmosphere alone.  They are mostly satisfied with the economy’s growth rate, employment figures, and the deceleration of inflation.   Yes, the most recent inflation data from the Consumer Price Index was a bit higher than many expected (Atlas will have more to say on this in a subsequent note), but it was just one data point, far from a trend.  There will be other price proxies released later this month which will provide a more rounded look at prices.  If we see a reacceleration in prices, however, don’t be surprised if the central bank is accused of being tone deaf.