I must preface my remarks on the economy for 2015 with the acknowledgment that I consider the United States economy is going through a period of transition of the longer-term variety. This transition, as longer-periods of economic transition do, is going to be a restraint on just how much economic growth the economy can achieve over the next five to ten years. I believe that it will not be anywhere near what the United States economy was able to achieve over most of the past sixty years or so.
The economy is still on the recovery path from the Great Recession that ended in June 2009. For the first five years plus one quarter, the United States economy has grown at a 2.3 percent annual compound rate of growth. For the previous sixty years or so that ended at the peak of the business cycle in December 2007, the economy grew at an annual compound rate of growth of 3.2 percent.
I believe that there are a couple of things that need to be discussed in trying to understand what the US economy has just gone through in order to pick up some perspective on the current situation.
First, the US economy did not accelerate out of the Great Recession like previous business cycle recessions with really fast growth in the first four to six quarters after the previous recession ended. The highest year-over-year growth rate achieved by the economy was 3.1 percent and this was attained twice.
Second, the US economy over the sixty-two quarters of expansion has not seemingly built up any major excesses. These excesses in previous expansions came in housing construction, inventory buildup, and over-investment in business capital. Also, at least in the last twenty-five years or so, there was a large buildup of labor hoarding. That has not been the case in the current period of economic recovery.
At present, this recovery is the fifth longest economic recovery in United States history. In one more year, if it makes it, it will become the fourth longest recovery. And by the time President Obama turns over the presidency to the 45th president of the United States, if it continues, the economy will become the third longest recovery. There don't seem to be any notable excesses that might stop the economy from achieving these milestones.
Third, this current recovery has seen a monetary expansion that is unmatched in United States history. Some economists have been predicting an burst of inflation for several years now. There are still many that believe that the United States has an inflationary future. But, for right now, business lending seems to be relatively tepid and commercial banks don't seem to be in any hurry to lend out much of their excess reserves.
Fourth, inflationary expectations seem to be quite low, substantially below the Fed's target level for price increases, which is 2.0 percent. Inflation forecasts by the Fed and other forecasters seem to believe that inflation will remain substantially below 2.0 percent for the next three- to five-years.
Fifth, there has been concern over the possibility of "credit bubbles" during this period of recovery. The stock market is one place economists have targeted as a possible location of a bubble, but also commodity markets have been suggested as another location, and the securities of emerging markets has been picked out as another.
The commodity markets have seen fairly substantial declines in recent months as has the markets for emerging market securities, but each seems to be absorbing the losses in good form.
A fear right now is that the plunge in the price of oil might cause some defaults, especially of Venezuela…and, possibly Russia, among others.
The stock market seems to be doing well, as long as the Federal Reserve continues to keep on its current path, which includes keeping short-term interest rates low for a considerable period of time. With the economy showing relatively modest growth and with the budget deficit of the federal government remaining relatively under control, the Federal Reserve, I have argued, will not have much pressure on it to begin raising interest rates in the near term.
And, this gets us to an important point. The thing that will keep the United States economy on its current growth path will be the absence of shocks. The first "shock" that needs to be avoided is actions by the Fed that might cause the banking system contract, which would lead to a collapse of the economy. That is, the Fed, in trying to reduce the massive amount of excess reserves that now exist within the banking system, might somehow cause the banking system to contract, much as it did in the 1937 time period.
As I have described in many posts, this is one thing that the officials of the Federal Reserve are trying very hard to avoid. They are very sensitive to this and will do their best, I believe, to reduce the reserves in the banking system without causing further troubles.
But, this brings up the concern about another shock to the economy. There are numerous places in the world that could explode and cause the "shock" that brings down global economy. I just mentioned the problems that could occur in Venezuela and some other oil producing countries, like Iran, than could suffer real economic and debt problems due to a low price of oil. Then there is the eurozone, where the European Central Bank has predicted economic growth over the next couple of years at 1.0 percent to 2.0 percent…at best. And then there is Russia.
Lots of places where things could go wrong.
So, with these thoughts in mind, let's look to the future growth of the United States economy.
To me, the two things that will constrain growth in the United States over the next five to ten years has to do with labor force participation and the capital stock. In the 1960s and 1970s the United States economy saw a large increase in labor force participation due to a massive influx of women into the workforce. This labor force participation rate peaked in the late 1990s and has now dropped to less than 63.0 percent, the lowest level since the late 1970s. This is a reflection of the mismatch between a fairly large segment of the work force and the jobs of the new information age. Even thought the recorded unemployment rate may fall, there has been so many potential members of the labor markets that have dropped out and this is a reflection of the disjunction that exists in the US economy right now.
The same thing can be said of the "measured" capital stock. Only last month did the capital utilization rate rise above 80.0 percent. The peak rate of capital utilization rate in each economic recovery has been falling since the late 1960s. It is true of the current period of recovery. This, to me, also reflects the changing nature of business in the world and gives us an indication that the current economic recovery is facing more than just a business cycle recovery.
Putting these factors together, I come up with a projection for 2015 of 2.6 percent to 3.0 percent. I believe that 3.0 percent is optimistic, a level the Nouriel Roubini, "Dr. Doom", put out just yesterday.
Last year I produced a forecast for 2014 of 3.0 percent to 3.5 percent. I was very optimistic because it seemed as if the economy was on an upswing, and the latest year-over-year actual result was 2.6 percent. This year, the year-over-year rate of growth for the third quarter was only 2.4 percent. I just don't believe that the economy is going to come in too much above this number. Of course, one of the downside shocks mentioned above could hit and 2.6 percent might seem high. Given the length of the current recovery, I just believe that the greatest risk is on the downside.
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