By John Richardson
THE WHITE House has to clear two major barriers if it is going get anywhere close to its target of raising US GDP growth to 3% a year. Over the past decade, the economy has grown at an average of about 2% a year. The Congressional Budget Office predicts annual average growth of around 1.9% well into the next decade.
Firstly, there is the issue of an ageing population. Tightening labour markets in states such as Utah indicate a shrinking workforce as the growth in the number of retirees outpaces the growth in the number of young people entering the workforce.
This is the result of the end of the Babyboomer-driven demographic dividend. The US birth rate rose by no less than 52% in 1946-1964 – the years between which the Babyboomers were born. But since the 1970s, US birth rates have collapsed. As the chart above indicates, the greying of the population means lower consumer spending, based on where economic policy stands today.
The second barrier is the decline in US productivity growth. “US productivity is set to grow this year at around a third of the pace prevailing before the financial crash,” writes the Financial Times. It adds that the Conference Board is predicting 1% growth in US productivity in 2016 – well short of the 2.9% per annum growth seen in 1999-2006. The US would need constant productivity growth of 2.6% over the longer term to deliver the White House’s target of 3% GDP growth.
The fall in productivity growth has perplexed many economists, but not Robert Gordon, author of The Rise and Fall of American Growth. As the Chicago Tribune writes, quoting Gordon’s work:
“There has been a secular end to a long technological cycle — that the low-hanging fruit of innovation-driven gains has been picked: the first industrial revolution, air conditioning, automobiles, computers and communications and the replacement of small stores by big-box chains.”
The Tribune adds that Gordon believes the job-creating potential of robots, artificial intelligence, big data and driverless cars “has been oversold or already baked into the existing economy.”
This tells us that even with a smoothly functioning White House, raising GDP growth to 3% per annum was already a huge challenge. But the White House is of course in chaos.
The Outlook for the Rest of This Year
My post last Wednesday was well-timed. Volatility in US equities was at its lowest level since 1993 as I wrote my post. US stock markets were also at record highs on confidence that the Trump administration would deliver on its ambitious growth agenda.
I warned that this wouldn’t last much longer because of the long-term challenges facing the US economy – and because of the controversy surrounding all the allegations over the Trump administration’s links to Russia, and the sacking of FBI chief, James Comey. This risked policy paralysis, I warned.
Not much longer turned out to be just a few hours. During US business hours on Wednesday, the Chicago Board of Exchange’s Volatility Exchange’s Volatility Index surged by almost 50% in the space of just a few hours. following more political turmoil. Meanwhile, US equities saw a sharp sell-off before bouncing back the following day.
The risk is that a much deeper and longer term sell-off in US equities will take place. This could happen when consensus thinking catches up with the likelihood that the Trump administration will be unable to get meaningful tax reforms and an infrastructure spending bill through Congress in 2017, because of its political problems. Volatility in equities will also likely return with a vengeance.
(The other “shoe to drop” could be when the consensus realises that China’s economy is likely to continue to decelerate for the rest of 2017 on the reduced availability or credit. In April, China’s Total Social Financing – a measure of all new lending in the economy – fell by 34% over March to Yuan1.39 trillion).
Let’s assume I am wrong about the US, however, and that the White House does get substantive tax reform and infrastructure spending through Congress before the end of this year. This would lower the short-term risks of a sell-off in equities and a weaker global economy.
But the question would then become whether these measures would by themselves enable the US to escape from secular lower economic growth. I believe the answer would be “no”.
The Longer Term Debate
Part of the policy mix might have to be also be an increase in the age at which Americans are allowed to retire. This could help to ease some of the tightness in US labour markets. Improvements in healthcare mean that it is now more realistic to expect people to work beyond the age of 70.
Then there is immigration. There are plenty of young people in the world, but youthful populations are concentrated in developing countries. The US could as a result import better demographics. But right now, the political mood suggests that this solution is extremely unlikely to be adopted.
How can the US raise productivity? Retraining workers to deal with ever-greater levels of automation, and the “Uberisation” of the economy seems to be on sensible approach.