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Saturday, November 23, 2019

Signs of Resiliency in U.S. Economy

The Trump tax cuts have worked their way through the U.S. economy. This summer, the economy showed signs of taking a breather from growth and jobs creation. I predicted that this soft patch would continue but not escalate into a recession. I was right, but I was also a bit on the pessimistic side as to how resilient our economy is.

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On November 11 I predicted that the U.S. economy is taking a breather, or hitting a soft patch as some would way. The latest GDP growth number, I noted,
suggests that the peak of this growth cycle is over. The same applies to the growth injected into the economy from the Trump tax cuts. They were good and necessary, but their emphasis on the corporate side simply did not inject enough purchasing power into the economy to sustain this growth cycle any longer than this.
I also explained that there were no reasons at this time to suggest that this breather would escalate into a recession. The slowdown, allowing the economy to catch its breath,
will not escalate into a recession if Christmas shopping is strong and if U.S. manufacturers show resiliency in the fourth quarter. If consumer spending loses pace this Christmas, it is unlikely that manufacturers will keep hiring and get back to investing. Therefore, a disappointing holiday shopping season will tell us that it is time to upgrade the "breather" forecast to a recession forecast. My bet, though, is on a breather, not a recession.
The latest data on business activity support my forecast. In its November 23-24 weekend edition, the Wall Street Journal reports (p. A6):
Business activity in the U.S. is showing signs of a pickup in late 2019, contrasting with more sluggish economic performances in some of the world's other largest economies. Data company IHS Markit said Friday that its composite purchasing managers' index for the U.S., a measure of activity in businesses, osted a four-month high of 51.9 in November, up from 50.9 in October.
An uptick at this time of the year is expectable given the shopping season, but only if households generally show resiliency in their shopping plans. Private consumption accounts for more than two thirds of GDP, making it the driver of the economy on the spending side.

The Journal also reports that
U.S. business activity is muted compared with levels seen in the economic expansion that began in mid-2009. That, in part, reflects trade uncertainty that has delayed investments, particularly among manufacturers.
Since the economic breather began earlier this year, it is reasonable that business activity would be relatively "muted" for the season. At the same time, the comment about manufacturing is misleading. As my November 11 article explained, the data suggests that U.S. manufacturers have spent the first year and a half after the Trump tax cuts expanding their capacity. This was in response to the tax cuts, the Trump administration's regulatory rollback and strong (but not spectacular) consumer spending.

Now that they have expanded their capacity and have basically filled it up with equipment, they have no immediate need to grow investments. If consumer spending remains strong through Christmas, it will carry the economy through this breather and back to growth somewhere in the first quarter of next year. At that point we will again see manufacturing investments grow.

From the employment side, manufacturing is fairly strong. On a year-to-year basis, manufacturing jobs have grown 21 months in a row. Looking specifically at October 2019 compared to the same month last year, the growth was only 46,000 jobs for a total of 12,820,000, down from a 2.2-percent growth a year earlier and 1.14 percent in 2017. Nevertheless, it was still an increase.

Looking again at October this year over the same month in 2018, a total of eleven private industries added jobs: construction, manufacturing, wholesale trade, transportation, finance and insurance, real estate and rental services, professional and business services, education, health and social services, leisure and hospitality, and the "other" category. Only four industries saw a decline, and it was overall smaller numbers: mining, retail, utilities and information.

In one year, the private sector has added almost two million new jobs; the total since October 2016, the month before Trump was elected, is 6,550,000. That is how many more Americans are working - in the private sector. This growth has outpaced the growth in government jobs:
  • In October 2016 there were 184 government jobs, counting federal, state and local, per 1,000 private-sector jobs;
  • In October 2019 the Government Employment Ratio had fallen to 177.

This is not a spectacular improvement, and it will not have any immediately positive effects on the economy, but it is a small sign of a slow, structural improvement of the American economy.

It is also worth noting that we remain the leader in the free world when it comes to economic growth. The eurozone is in a state of permanent stagnation, unable to even break the two-percent growth barrier. It will not get better with Christine Lagarde as the new president of the European Central Bank. The Wall Street Journal again:
In her first speech as head of the European CentralBank, Christine Lagarde warned on Friday that a fracturing of the global economic system means that robust rates of economic growth "are no longer an absolute certainty."
She then blamed "ongoing trade tensions and geopolitical uncertainty" for slowing down international trade. This, Lagarde suggested, has "depressed global growth to its lowest level since the great financial crisis".

Which, by the way, was not a financial crisis, but that is a story for another day. The point here is that Lagarde gives the impression that the euro-zone economy has taken a recent nose dive thanks to trade tensions between America and China, and re-negotiated trans-Atlantic trade deals. Nothing could be further from the truth: already five years ago I presented a detailed analysis of the European economy and the macroeconomic mechanics of its perennial stagnation.

Plain and simple: Europe is in a state of stagnation thanks not to recent trade tensions but to the welfare state. It is too big, too costly and too filled with disincentives toward work and entrepreneurship.

One reason why Lagarde blames trade tensions is, very likely, that Europe cannot ride on America's economic coat tails in the same way it could before. Exports can no longer drive Europe's economy as it has in the past - they simply have to look inward for new sources of growth. Inevitably, that means lower taxes and a smaller government.

For most Europeans, this is unthinkable. Yet with an economy that cannot even give new generations a decent start in life, but instead slips deeper and deeper into industrial poverty, the unthinkable will eventually become the inevitable.

Just look at us: three years ago it was unthinkable that we would see a dramatic tax reform like the one Trump got done; as limited as it was, it gave our economy a shot in the arm and restored business confidence like we could barely dream of under the Obama years. Now that we have run out of that steam we need for our politicians to stay far away from tax hikes and to sit still and do no more harm on the spending side. No more big, costly entitlements; no more talk about Medicaid for All or paid family leave.

If we can get through next year with no change for the worse on taxes and spending, we should see some solid economic strength going into President Trump's second term. 

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