- The US economy appears to be doing well, with the election only nine months away, maybe not because of what the president has done but by what he hasn't done.
- Other than the tax reform bill passed in December 2017, most of the president's actions have been to remove rules and regulations, thus letting the economy define itself.
- Unemployment is at a fifty-year low, the economic recovery is almost eleven years old, the inflation rate is 1.7 percent, the dollar is strong, and stock prices hit historic highs.
The state of the economy is going to be important for the presidential election coming up, although it may not be quite as important as President Trump sees it, calling for a referendum on the economy.
Right now, the economy is not setting any records as far as growth is concerned and, in fact, is actually growing by far less than the president or, for that matter, almost anyone would like it to grow.
U. S. Treasury Secretary Steven Mnuchin has just announced that U. S. officials are expecting that the economy may grow by less than 3.0 percent this year.
Two other government projections expect an even lower outcome for the year. The Congressional Budget Office, for example, is expecting that the US economy will grow by only 2.2 percent in 2020. The Federal Reserve’s outlook is for an even slower growth, 2.0 percent.
The general mode, in terms of real GDP growth, is that the economy is facing the fact that the world economy is slowing, the Chinese virus has been spreading, and Brexit still has to be defined and executed.
The president would like to call for a vote on the economy because things seem to be doing well, actually a lot better than they initially look when just scanning the macro-economic numbers on the aggregate economy, and the rest of the world doesn't look so good.
When one digs below the surface of the aggregate numbers, one finds that the U.S. economy is doing well.
In terms of wealth creation, the stock market keeps hitting new historical highs. It doesn’t seem to want to stop and one can make the argument, as I have in many posts, that the stock market can continue to hit new highs in this calendar year of 2020.
Secondly, the unemployment rate remains around 3.6 percent, near the fifty-year low of 3.5 percent and by all indications, “wages seem to be picking up for a wide range of workers, not for just the highest paid.”
I believe that the unemployment rate will remain low, that in 2020 we will continue to work on the Labor Force Participation rate, and efforts will be made to actually get more marginal participants in the labor market more fully engaged. This is a condition of the changing nature of the job market and the continued decline in the role that manufacturing plays in the current economy.
In addition, inflation continues to remain low and both the Congressional Budget office and the Federal Reserve are picturing an inflation rate in the near future of less than 2.0 percent per year.
The inflationary expectations built into government bond yields remain around 1.7 percent. Again, the changes we are seeing in the makeup of the economy have led to money and credit going into non-industrial uses where financial engineering is in vogue and where consumer and wholesale prices are not directly impacted.
The US dollar remains strong and is expected to stay strong or get even stronger during the year.
Although investment in physical capital has not shown much strength in the current period of economic expansion, investment in intellectual capital remains at an all-time high and is expected to remain near these levels into the foreseeable future. With the shift in the economy away from manufacturing and toward services and networks, investments in large physical capital projects will not be as pronounced.
However, consumer spending also remains strong and is expected to continue driving the spending going on in the economy.
Looking around at many of the micro-segments of the economy, one sees lots of activity and lots of innovation and creativity.
But, unless there is a major breakdown in some area of the economy or in some area of the world, it is hard to see any bad news about almost anything economically related in the next nine months.
As Greg Ip writes in the Wall Street Journal, although President Trump has taken credit for many of these “trends” in the economy, most, if not all of them, began before he took office.
But, one could argue that these “trends” have continued, not because of what Mr. Trump has done, but they have continued because of what Mr. Trump has not done. And, in this case, doing little or nothing seems to have been exactly the right thing to do.
The major piece of economic legislation achieved during the administration of Mr. Trump was the tax reform bill passed by the US Congress in December 2017. Otherwise, most of what Mr. Trump has done is to relax rules and regulations.
Most economists argue, as I do, that the tax reform bill did very little to stimulate the economy and could almost be marked down as having made very little difference in how things proceeded through 2018 and 2019. Estimates have indicated that almost two-thirds of the benefits of the tax reform bill were used by companies to buy back their own stock. Not bad for the stock market, not so good for investment in physical capital by corporations.
As a result, as I have constantly argued, the economy has been driven by the supply side and not by aggregate demand. Therefore, productivity growth has been the force increasing the aggregate, real Gross Domestic Product, and this process has been the primary reason why economic growth has been so slow this century. The growth of labor productivity has just not been that robust.
Growth has been steady, it has been persistent, and it has continued, making this period of economic expansion the longest in United States history. It has also contributed to all the micro-pluses that I mentioned above.
The transformations that have taken place in the economy over the past twenty years or more have been very positive for the economy. It is just that we are still measuring economic activity in an old, out-dated manner. We need to revise our statistics in order to better understand what is fully going on in the economy.
But, this transformation has been a very beneficial one for shareholders and if it continues through 2020, stocks should continue to hold on to their new historic highs or might even attain some new ones. The economy will continue to grow, wealth will continue to rise, unemployment will remain low, and policy makers, both in terms of monetary policy and fiscal policy, will not have to make any severe moves that could possibly disrupt the economy.
Oh, there may be some things that this administration could do to build up and strengthen the economy. Infrastructure spending could be a real plus. Further advances in education and life-time learning could also help to build the workforce and could help to raise the labor force participation rate. Efforts could also be made to incrementally and patiently reduce the federal debt. And, even more encouragement could also be given to further build intellectual capital.
But, these are long-term efforts to build economic momentum and not short-run fixes aimed at boosting up short-term growth rates.
The bottom line is that the economy really seems to be performing very well. Unless there is some market collapse somewhere during the year, the U.S. economy should sail through the election in pretty good shape. This seems to be what Mr. Trump is hoping for.
And, investors should really like this environment.
This article was written by
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