Kevin Kliesen | Photo by Boris Ladwig

The unemployment rate, inflation and other major indicators suggest that the economic expansion will continue in the nation as well as Louisville, buoyed, at least in the short term, by lower taxes and high confidence among businesses and consumers, two Federal Reserve economists said Thursday in Louisville.

“Nationally and locally, things are looking good,” said Kevin Kliesen, business economist and research officer at the Federal Reserve Bank of St. Louis.

However, Kliesen warned that he is seeing some subtle warning signs — inflation risk, stock market volatility, industrial production moderation — that could point to a weakening of the economic expansion, which, at nearly nine years, already is the third-longest on record.

If the expansion continued through May, it would be the second-longest, and if it extended past July of next year, it would become the longest expansion in the nation’s history. On the downside, GDP growth during the expansion has been the weakest on record, at an average 2.2 percent.

Many current indicators still reflect strong economic fundamentals: The unemployment rate remains low, and Friday’s jobs report is “probably going to be pretty good,” Kliesen said.

Charles Gascon

His colleague, Charles Gascon, regional economist and senior coordinator at the St. Louis Fed, said the Jefferson County unemployment rate in December was 3.6 percent, while job growth last year, at 2.1 percent, outpaced the national growth, which was 1.5 percent.

Housing prices appreciated at 6.2 percent in the fourth quarter, just below the national average — though single-family building permits lagged the national average, in part because of low inventories and construction firms struggling to find workers, he said.

“The numbers look overall pretty good,” Gascon said.

Kliesen and Gascon made the comments at a Regional Economic Briefing Thursday at the Kentucky Derby Museum.

Kliesen said interest rates have remained low, consumers in surveys express positivity about their economic situation, and lots of businesses, thanks in part to lower tax rates, expect to make investments in the next six months.

Logistics and transportation measures, which are of particular importance to Louisville because of companies including UPS, the largest local employer, also are trending in the right direction.

A lot is being produced, Kliesen said, and a lot is being moved.

Increasing risks

Beyond the length of the current expansion, Kliesen said other worrisome signs are starting to appear: For example, monetary policy has increased the inflation risk.

As the Fed has increased the federal funds rate, interest rates on treasury securities have ticked up, as have costs for auto and home loans — though they remain far below levels they reached before the most recent recession.

Charles Gascon | Photo by Boris Ladwig

Gascon said that his business contacts in the region have told him that the tight labor market continues to prove challenging.

Gascon relayed some of the conversations in the Fed’s latest Beige Book, released Wednesday: “Construction contacts continued to report shortages in qualified labor. Technology and manufacturing contacts in St. Louis and Memphis, respectively, also reported difficulties hiring suitable employees. Contacts in Louisville and Little Rock cited candidates’ inability to pass drug tests as an impediment to hiring.”

Employers’ struggles seem to be pushing wages higher: “On net, about 70 percent of contacts reported wages were higher or slightly higher than a year ago, and a similar share reported increases in labor costs. A construction contact in Louisville cited the need for higher wages to attract and retain skilled labor,” the Fed wrote.

Source: Federal Reserve Bank of St. Louis

The business outlook has changed little from November, Gascon said, with 54 percent of contacts saying that they expect economic conditions this year to be “better or somewhat better” than last year. The Fed’s sources reported lackluster consumer spending, weaker auto sales and continued constraints in the housing market. January home sales fell 5 percent from December.

Kevin Kliesen

Kliesen said his national forecast calls for GDP growth this year of about 4 percent, an unemployment rate near 4 percent and inflation of about 2 percent.

However, he said some risk factors have become more noticeable: Some of the January data suggest that first-quarter GDP growth could be weaker than expected, and while the tax cuts may accelerate growth, a larger-than-expected deficit also could lead to a spike in inflation and higher interest rates.

Another wild card, Kliesen said: international trade disruptions, which could roil stock markets, increase business uncertainty and dampen economic growth.

President Donald Trump’s planned tariffs for imported steel and aluminum, for example, would probably have a net negative effect on economic growth and job creation — even without retaliation from trading partners.

“Having a vibrant steel and aluminum industry domestically is clearly a net benefit … for the country,” Kliesen told Insider, “but being able to import lower-cost steel, lower-cost aluminum is also a benefit for manufacturers and consumers.”