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What Does an "Overheated Economy" Look Like?
Old 10-11-2018, 09:17 AM   #1
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What Does an "Overheated Economy" Look Like?

The Fed has raised interest rates. They plan on four rate hikes next year. It's all over the news.

Inevitably, the writer of the news article will include the phrase, "this is being done to prevent the economy from overheating", or "this is an effort to ward of an overheated economy".

I vaguely remember that an overheated economy is when wages are increasing, inflation is increasing, there is full employment and production can't keep up with demand. Basically everybody that wants a job has a job, are getting well paid, and they are buying stuff like crazy.

I'm 60 years old. I've lived through the Reagan boom years of the mid-late 80's and the Clinton boom years of the late 90's. While good economic times for sure, I don't remember it being referred to as being overheated.

OK, so when in US history have we seen an overheated economy? What happened?
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Old 10-11-2018, 09:26 AM   #2
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1999-2000.

Everybody was getting rich from the stock market. The Internet and computer industry were red hot. Broadband, telecom, semiconductor companies saw their valuations going through the roof, heading for the moon. Not enough technical workers. Many GIs did not re-enlist to go work for more money in the private sector. There was talk of the "new economy". Money could be created by dotcoms out of thin air, like bitcoins do now. Unemployment was low. Cisco was destined to be the first trillion-dollar company. Nortel was riding high as the next rival. Lucent, Global Crossing, etc...

What happened after that was not a pretty sight.
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Old 10-11-2018, 09:36 AM   #3
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1999-2000.

Everybody was getting rich from the stock market. The Internet and computer industry were red hot. Broadband, telecom, semiconductor companies saw their valuations going through the roof, heading for the moon. Not enough technical workers. Many GIs did not re-enlist to go work for more money in the private sector. There was talk of the "new economy". Money could be created by dotcoms out of thin air, like bitcoins do now. Unemployment was low. Cisco was destined to be the first trillion-dollar company. Nortel was riding high as the next rival. Lucent, Global Crossing, etc...

What happened after that was not a pretty sight.
Yes, I guess that would be the closest we've come to an overheated economy. However, that was in only one or two sectors, tech and telecommunications, and it was driven largely by speculation. Yes, the internet infrastructure was being built up but that was pretty much where all the action was taking place. Online shopping was just getting started. Google was, what, a year old?

There was not rampant inflation, wages were not rising rapidly, at least not outside tech, production of most other goods were not happening 24/7.
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Old 10-11-2018, 09:40 AM   #4
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Labor shortages, “lofty” equity and/or real estate “values”, inflation...
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Old 10-11-2018, 09:43 AM   #5
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Inflation in 2000 was not really bad, but at 3.38% it did rise up from 1.55% in 1998, and 2.19% in 1999. By 2002, inflation went back down to 1.59, along with the stock market crash.

Unemployment rate in 2000 was 4%. It is at 3.7% now.
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Old 10-11-2018, 09:48 AM   #6
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Inflation in 2000 was not really bad, but at 3.38% it did rise up from 1.55% in 1998, and 2.19% in 1999. By 2002, inflation went back down to 1.59, along with the stock market crash.

Unemployment rate in 2000 was 4%. It is at 3.7% now.
Yes, but the market being overheated is not quite the same as the economy being overheated.
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Old 10-11-2018, 09:55 AM   #7
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Probably the classic answer here is postwar late 40s. Inflation skyrocketed. Perhaps this was useful to help eat the huge debt.

Ike in the 50s reversed course on debt growth and the economy endured a few recessions.

Like someone else said, markets or asset overheating ("irrational exhuberance," remember that?) differs from economic overheating.
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Old 10-11-2018, 10:25 AM   #8
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Also, I wonder when the careless (in all senses of the term) aspects of the current economy will bring forth their economic consequences. Sure, some regulations were antiquated and should have been jettisoned. But in an overpopulated world, just abandoning all thought for the environment (coal - burn it!) and all care for worker welfare (let's abandon a large minority of the population to substandard healthcare) and as much multilateral cooperation (every nation for itself) may well bring short-term gains and "economic growth" whatever that is - but to act like there are no costs means that said costs will pop up from other places. In other words, does just doing away with regulations means postponing costs of whatever they were meant to cover?
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Old 10-11-2018, 10:29 AM   #9
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Proceed with extreme caution when government officials are cheerleaders for the stock market. Listen to the CEOs and CFOs in the conference calls for a pulse of what is going on in the economy not government data which is backward looking. Markets discount the future not the past. What has spooked the market recently are the following:

The warning from PPG industries on Monday - read the recent conference call minutes or re-broadcast.

Declining auto sales are more severe than projected

The glut of semiconductors in the marketplace which is causing a plunge in prices

IMF warning of another financial crash late last week

The imminent Sears Bankruptcy will lead many others to follow in the retail space.

I don't invest in equities, funds, or ETFs but have a substantial laddered bond portfolio. I do keep a pulse on the market as all I care about is whether a company can continue to service their debt with sufficient interest coverage from their operating earnings. I also keep a pulse on the sectors that I am invested in through the trade publications.
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Old 10-11-2018, 10:36 AM   #10
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But Freedom, I have a question on this - aren't these people cheerleaders themselves? Isn't their motivation to tilt the machine to favor their particular company? And also, isn't their timeframe very short term these days - that is, their actions are directed towards the immediate quarter?

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Proceed with extreme caution when government officials are cheerleaders for the stock market. Listen to the CEOs and CFOs in the conference calls for a pulse of what is going on in the economy not government data which is backward looking. Markets discount the future not the past. What has spooked the market recently are the following:

The warning from PPG industries on Monday - read the recent conference call minutes or re-broadcast.

Declining auto sales are more severe than projected

The glut of semiconductors in the marketplace which is causing a plunge in prices

IMF warning of another financial crash late last week

The imminent Sears Bankruptcy will lead many others to follow in the retail space.

I don't invest in equities, funds, or ETFs but have a substantial laddered bond portfolio. I do keep a pulse on the market as all I care about is whether a company can continue to service their debt with sufficient interest coverage from their operating earnings. I also keep a pulse on the sectors that I am invested in through the trade publications.
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Old 10-11-2018, 10:47 AM   #11
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But Freedom, I have a question on this - aren't these people cheerleaders themselves? Isn't their motivation to tilt the machine to favor their particular company? And also, isn't their timeframe very short term these days - that is, their actions are directed towards the immediate quarter?
Some CEOs are cheerleaders but they are required to disclose material information ahead of any insider transactions and to establish some credibility. In the case of PPG, Bloomberg summarizes why the stock plunged on Monday before yesterday's overall market drop.

https://www.bloomberg.com/news/artic...ng-costs-china
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Old 10-11-2018, 10:53 AM   #12
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Freedom, thanks for that link.
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Old 10-11-2018, 12:17 PM   #13
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Overheated Economy - Investopedia
https://www.investopedia.com/terms/o/overheated_economy.asp
DEFINITION of 'Overheated Economy' An overheated economy is one that has experienced a prolonged period of good economic growth and activity that has led to high levels of inflation (from increased consumer wealth).
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Old 10-11-2018, 12:54 PM   #14
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Labor shortages, “lofty” equity and/or real estate “values”, inflation...
+1. Add in fear, and panic based on speculation, not fact.
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Old 10-11-2018, 12:56 PM   #15
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Overheated Economy - Investopedia
https://www.investopedia.com/terms/o/overheated_economy.asp
DEFINITION of 'Overheated Economy' An overheated economy is one that has experienced a prolonged period of good economic growth and activity that has led to high levels of inflation (from increased consumer wealth).

"Prolonged period" is what, exactly?
"High levels of inflation", we're not seeing that.
"Abnormal consumer confidence" (from the linked article), we're not seeing that.

Article also says:
Between June 2004 and June 2006, the Federal Reserve Board increased the interest rate 17 times as a gradual means of slowing America's overheated economy.

I don't consider those two years to be an overheated economy. It certainly doesn't meet the article's own criteria.
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Old 10-11-2018, 01:38 PM   #16
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Article also says:
Between June 2004 and June 2006, the Federal Reserve Board increased the interest rate 17 times as a gradual means of slowing America's overheated economy.

I don't consider those two years to be an overheated economy. It certainly doesn't meet the article's own criteria.
I cannot recall if the Fed was trying to slow down the housing bubble during that period.
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Old 10-11-2018, 01:48 PM   #17
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No matter what triggers the next downturn, the Fed will take the blame. It is already being set up by our illustrious leader as a strawman to explain the recent drop in the DOW.
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Old 10-11-2018, 02:00 PM   #18
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OK, so when in US history have we seen an overheated economy? What happened?
Look at this graph
https://fred.stlouisfed.org/series/FEDFUNDS

The peaks are times that the Fed thought the economy was "overheated", or, at least, that inflation was "too high". Those peaks are often followed by recessions.
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Old 10-11-2018, 04:06 PM   #19
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Quote:
Originally Posted by Qs Laptop View Post
"Prolonged period" is what, exactly?
"High levels of inflation", we're not seeing that.
"Abnormal consumer confidence" (from the linked article), we're not seeing that.

Article also says:
Between June 2004 and June 2006, the Federal Reserve Board increased the interest rate 17 times as a gradual means of slowing America's overheated economy.

I don't consider those two years to be an overheated economy. It certainly doesn't meet the article's own criteria.
At first they were normalizing interest rates after dropping them substantially during the 2000-2002 recession followed by a credit crunch. Then later, as housing was obviously going haywire, they started to attack the overheating by raising rates more aggressively.
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Old 10-12-2018, 09:13 AM   #20
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At first they were normalizing interest rates after dropping them substantially during the 2000-2002 recession followed by a credit crunch. Then later, as housing was obviously going haywire, they started to attack the overheating by raising rates more aggressively.
If you look at that chart at the link posted by Independent you will see that the Fed raised interest rates 19 months in a row starting in June of 2004. The Fed fund rate went from 1.0% in June 2004 to 5.25% in January 2006 in that time.

During that same time the unemployment rate went from 5.6% down to 4.7%.
https://www.doleta.gov/performance/c...t_Jan03_09.cfm

Median weekly earning went from $635 to $662, a 4.25% increase.
https://www.bls.gov/opub/ted/2014/ted_20141028.htm

Consumer confidence was gyrating all over the place during that time frame, starting at 95.6 and ending up at 91.2.
http://www.sca.isr.umich.edu/files/tbmics.pdf

The inflation rate was 3.26% in 2004 and 3.42% in 2005; above the Fed's stated goal of 2.0%, but hardly bad enough to raise rates from 1% to 5.25%.
https://www.inflation.eu/inflation-r...ed-states.aspx

It's strange to look at that Fed funds chart. It seems every time the Fed raises rates a recession follows. Maybe they are raising them too high or too fast or both.
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