The Economic State of the Union

 

On Tuesday night, January 20th, President Obama gave his next to last State of the Union Address before a joint session of Congress and a vast audience of Americans watching and listening at home. And even though he faced a House and Senate delegation boasting a Republican majority for the first time in his presidency, due to the Democratic Party’s overwhelming defeat in last fall’s midterm election, and his approval rating measured a mere 50 percent, the Commander in Chief’s address was upbeat, positive and remarkably self-assured.

The reason that the President was able to claim that the “state of the Union is strong,” is because on the economic front, at least, the news, lately, has been very good. Unemployment has dipped to its lowest level – 5.8 percent – since 2008; deficits have shrunk by two thirds since his first inauguration; the economy is growing faster than it has in over a decade, with job expansion at a 15 year high; the stock market has more than doubled since the beginning of the Great Recession; and health care costs are rising at their lowest rate in 50 years. Add to these impressive statistics is the fact that gasoline prices have dropped by almost half since last summer, and gas is now selling for about $2 a gallon in many parts of the country.

And yet, for many Americans, the economy has not fully recovered. For that reason, Obama called for a number of new and expanded tax credits to help working families, while at the same time asked Congress to raise the top tax rate on capital gains to 28 percent from its current 23.8 percent level; levy a new tax on the largest U.S. financial firms and banks with assets over $50 billion; and close a tax code loophole that allows the wealthiest Americans to pass their assets onto their children without paying the full capital gains taxes on those earnings during their lifetimes. It’s time, the President urged, for the one percent to share its wealth with the rest of the country.

But while President Obama was quick to highlight the American economy’s robustness, the nation’s Federal Reserve Bank, whose mandate is to promote maximum employment and price stability, is still hedging its bets. Yes, it has ended its policy of “quantitative easing” (the six-year program, in which it bought $4.5 trillion worth of mortgage-backed securities and Treasury bonds with money it created out of thin air in order to pump liquidity into the marketplace), but, for now, at least, the Fed has decided to keep interest rates at their historic lows.

The reasoning behind maintaining low interest rates is to keep the trajectory of household and business spending on the upswing. Low rates make it possible to borrow money more cheaply which spurs both consumer spending and investment. Until the Fed determines that the recovery is long-term and that inflation will be held in check, interest rates will continue to be extremely beneficial to borrowers.

This means that for certain players in the economy, now is the time to move – before interest rates are hiked (which, according to Fed forecasts, may well happen in June of this year, or even earlier). For example, if you are buying a home, mortgage costs may never be lower. If you are selling commercial real estate, the combination of cheap money and a brighter economic outlook puts you at an advantage. Because as the job market continues to pick up, more and more employers will be likely to invest in larger office spaces and warehouses. More entrepreneurs are going to be starting new businesses and they will need stores and other outlets for their goods and services. In addition, the spate of borrowing is bound to increase just before the rates do go up, so money will be flowing throughout the financial system for at least the next quarter.

So, regardless of how you might feel about any or all aspects of the President’s address, or for the policies he claims will hasten the final recovery of the economy, for the present moment, most Americans agree that we are on the right path to an economic resurgence. The question is: how will you choose to profit from it?