Debt-Financed Growth

Seeding a Boom/Bust Cycle

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The stock market is not the economy. Some sayings never get old, they just get better and more pertinent with time. The economy remains on firm footing despite recent market gyrations. The Federal Reserve appeared to welcome a market correction that released steam from bubbling asset prices. More reasonable asset prices today mean there will be less to counteract than if prices had continued their upward trajectory with no interruption.

New York Fed President Bill Dudley referred to recent market moves as "small potatoes" in an interview with Bloomberg. He later underscored that "the little decline that we've had in the equity market today has virtually no implications for the economic outlook."

The economy is poised to grow faster in 2018 than it was just a month ago. Recently passed federal spending increases by Congress will add as much as the tax cuts to the pace of growth. The sticking point is rising deficits, which market participants now realize have a price: higher bond yields.

We are also likely to see acute labor shortages because we are adding an accelerant to overall economic growth when the unemployment rate is already extremely low.

Get Diane Swonk's full February Economic Update.

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