The tax cut bill has been passed and signed into law. Trump posted a "W" for 2017. Now, we have to live with it and see what it produces.
The Trump administration foresees the economy accelerating to a 3.0 percent rate of growth or more. Economists seem to be revising their projections upwards, although not as enthusiastically as members of the Trump team have done. Nick Timiraos writes in the Wall Street Journal about how these revisions are playing out.
Mr. Timiraos argues that one reason for this is that the more optimistic forecasts only take into account the perceived benefits of the tax bill. This does not take into account the increases in the federal budget deficits resulting from the tax bill and the perceived need to follow up this legislation with adjustments to entitlement programs and spending caps in order to keep the growth in the government's debt under control.
Furthermore, analysts don't see the tax bill sustaining the expansion the way that the Trump administration does. For example, Goldman Sachs revised upwards its forecast for 2018 to 2.6 percent. The expectation for 2019 is only 1.7 percent. Economists at JPMorgan, however, have only revised their 2018 forecast upwards to 2.1 percent.
It seems as if Wall Street economists are not seeing the Trump tax bill providing that much additional stimulus to an economy that is already proceeding through its eighth year of expansion. Even so, the Goldman Sachs economists anticipate that the unemployment rate in 2018 will drop to 3.5 percent, down from November's 4.1 percent level. In 2019, they are projecting that the rate will drop to 3.3 percent.
Reaching this low a level of unemployment would really be a cause for celebration because, as Mr. Timiraos states, the last time the economy fell to this low a level of unemployment was in 1952.
The question about future economic growth, to me, really boils down to how fast the economy is going to be able to grow in the next couple of years. The big concerns here are the rate of growth in labor employed and the rate of growth of labor productivity - not just how much additional demand is being forced onto the economy.
In terms of the rate of growth in labor employment, the Goldman Sachs numbers are mind-boggling. To achieve the drop in the unemployment rate from 4.1 percent to 3.5 percent to 3.3 percent is incredible.
Declines like these imply that the labor force has become, "all-of-a-sudden," more compatible with job openings in terms or current technology than it has been for years. Unfortunately, I just don't see this radical transformation of the labor force taking place in the next year or two.
Also, I believe that this kind of change would cause acceleration in the growth rate of labor productivity, something that has been down near zero for most of the current economic recovery. This measure does not just change overnight.
The current pickup on the rate of growth of real GDP began in the third quarter of 2016. From a near-term low of 1.2 percent, year over year, in GDP growth, the rate of growth in the economy has picked up every quarter.
Real GDP growth rose to 1.5 percent in the third quarter of 2016 and 1.8 percent in the fourth quarter. In 2017, the growth rate increased from 2.0 percent in the first quarter to 2.2 percent in the second quarter and to a revised 2.3 percent for the third quarter.
The fourth quarter of 2017 will probably show a growth rate of around 2.5 percent, year over year. The reason for this continued rise is the catch-up that is coming in the economy as several areas of the country continue to recover from natural disasters.
The trajectory of real GDP growth tends to parallel the growth rate of industrial production. Since the second quarter of 2016, the acceleration of real GDP growth has pretty well shadowed the path that industrial production has followed.
In October and November, the year-over-year rate of growth of industrial production has jumped to 2.8 percent and 3.4 percent, respectively. This acceleration seems to be closely connected with the slowdown that took place in the third quarter of this year, which captured the impacts of the natural disasters on the economic performance of the country.
The acceleration of growth in industrial production will most likely drop off in December and in early 2018.
A further piece of information here is the rate of capacity utilization in total industry. Capacity utilization dropped in the third quarter of the year but picked up again in October and November. However, capacity utilization in these two months was only 1.6 percent higher than they were one year ago and substantially below the levels achieved in 2014.
It is hard to see how business investment in physical capital can increase much when capacity utilization is so low. Furthermore, with the labor force participation rate at levels similar to the late 1970s, it is hard to see how tax benefits might result in a boom in investment expenditures.
In conclusion, let me just say that I can see economic growth reaching a 2.5 percent level in 2018. However, I am just not comfortable believing that this rate of growth is sustainable into 2019 and beyond. Like I explained above, I just don't see the acceleration in labor employment and any real increase in the growth of labor productivity. Consequently, for 2019-2021, I think economic growth will rest more in the 2.0 percent to 2.2 percent range.
The big unknown going forward is the Federal Reserve. There is a "new regime" coming into the Fed's leadership. Furthermore, this "new regime" is dealing with a situation no other central bank has ever had to deal with, the reduction in its balance sheet.
How the Federal Reserve will perform over the next year or two is a real uncertainty right now and with the uncertainty related to the bond market on top of this, there is a question as to how much disturbance to the economy might come from the financial sector in 2018.
Given that the current economic recovery is now approaching becoming the second longest economic recovery since World War II, other questions can be raised about just how long this recovery will last and what will bring it to an end.
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