US economic growth for 2019 came in at 2.3 percent, year-over-year, but the state of the economy is better than this number, at first, implies.
Unemployment remains low, wealth is increasing, and innovation is booming, indicating that if we look at more than just the aggregate numbers the economy is doing fine.
Recent forecasts from the Congressional Budget Office and the Federal Reserve predict that measured growth will continue to be modest, but the economy will continue to prosper.
There are things investors need to keep an eye on, like the coronavirus situation, the Middle East, and the Brexit underway, so the environment is still one with potential problems.
The United States economy grew, year-over-year by 2.3 percent last year, down from a 2.5 percent rate of increase in 2018.
The compound annual rate of growth since the beginning of the economic recovery in 2009 has been 2.3 percent.
Not real robust, but, then again, steady and solid.
Solid in the sense that consumer spending has risen year-after-year serving as the foundation for the recovery, unemployment, at 3.5 percent, has hit a fifty-year low, inflation continues to come in under the target rate for the Federal Reserve, and the stock market continues to hit new historic highs.
And, there have not been any major swings in the economy over the past ten and one-half years.
Justin Lahart, writes in the Wall Street Journal:
“maybe 2% growth is all one can reasonably expect for now. From a certain standpoint, that isn’t so bad. It appears to be enough, for example, to keep the labor market strong. And it is better than the growth that much of the rest of the developed world seems likely to generate.”
Two things I would like to emphasize once again:
First, all during this recovery, the supply side of the economy seems to be in control of what is actually being done in the economy, underwritten by solid, steady growth in consumer spending.
Business capital investment spending has not played much of a role and is not expected to in the near future.
Non-residential real estate investment spending has not played much of a role and is not expected to.
Residential real estate is going through a transformation and is not looked for as a source of future economic growth.
As a consequence, all we see looking forward is…more of the same.
The Congressional Budget Office came out the other day with new projections for the future of the economy. For 2020, the CBO is seeing the US economy growing at a 2.2 percent with the rate falling every year after that until it reaches 1.5 percent in the year 2025.
The Board of Governors of the Federal Reserve System released information in December about its forecasts for the near term. The Fed sees the economy growing by 2.0 percent in 2020, 1.9 percent in 2021, 1.8 percent in 2022, and 1.9 percent over the longer term.
There is nothing in the future that can be accounted for at this time to indicate that the economy will grow any faster in the future than it has over the past ten years or so.
The supply side of the economy is grinding things out.
Secondly, this scenario represents a whole new picture of the economy, one in which “we need to get away from the aggregate picture and concentrate more upon understanding what is going on at a more micro-level.”
Looking at more than just the aggregate numbers tells us that some very good things are going on in the economy.
For one, workers have been employed. New individuals entering the labor force are finding jobs. There are lots of open jobs that are not being filled.
Technology is booming. But, it is not technology based upon the production of new, physical capital equipment or non-residential construction.
Technology is booming, but it is coming from the side of intellectual capital, which is transforming the whole world. These advances are coming not only in information technology, but in health care, and in artificial intelligence.
As the technology matures, relatively less and less of “output” is coming from manufactured goods, and more and more “goods” are represented by services, a completely different way of producing and measuring what the economy is doing.
Finally, the demographics of the labor force have changed dramatically over the past fifty years that productivity measures, among other numbers, are really uninformative in terms of understanding what is really going on in the business world.
All of this is also impacting price inflation. Looking at the numbers the Fed likes to watch on inflation, we see that Personal Consumption Expenditures and Core Personal Consumption Expenditures came in around 1.5 percent and 1.6 percent, respectively, in 2019. These numbers are expected to remain below 2.0 percent for some time now.
So, we get asset price inflation in the economy now through the credit inflation that is so prevalent in the economy, but a much weaker picture for consumer prices, that seem stuck well below 2.0 percent.
One could argue that one reason that the stock market is performing the way it has, continually hitting new, higher, historical levels is because the actual shape of the economy.
This second point on the economy says that economic growth, as it is now measured in the US, will continue to remain mediorce. The stock market is telling us that on the other side, in terms of employment, wealth creation, and continued innovation, the US economy is still performing at remarkable levels, and will continue to do so.
That is, it will continue to do so barring some disasters that break every thing apart, like the Chinese virus, the possible explosion of relations in the Middle East, or, like a collapse coming from Brexit. We can certainly find things that could break everything up.
Until such break ups occur, it appears to me that economic growth in the near term, as measured by real GDP, will remain modest, while unemployment and wealth creation will continue to prosper.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
