U.S. Economic Growth 2017 Falls Short as Reflation Trade Busts
With President Donald Trump’s “Make America Great Again” agenda reigniting animal spirits within the investing community, expectations are high for U.S. economic growth 2017. Post-election month-over-month inflation has picked up steam, the stock market is frothier than ever, and the Federal Reserve has even started hiking interest rates again. Cursory indicators suggest an economic growth rate on the verge of busting through the anemic levels we’ve seen since 2010. U.S. economic growth 2017 is seemingly assured. But, in reality, it is much different, as we shall see. Oh, those pesky little details.
Also Read: 5 Signs of a U.S. Economic Collapse in 2017
The latest quarterly data reveals a current economic growth rate of 1.8%. This figure is smack dab in the middle of the stall-speed quarterly averages that America has seen since the great housing bubble in 2009. Despite claims by the previous administration that a great economic recovery took place, moribund growth has belied this fact. We seem to have reached a plateau in which neither more credit, nor lower interest rates, can move the needle much. Call it the “growthless” recovery.
Economic Growth Rate by Year (Since 2000)
(Source: “National Economic Accounts,” Bureau of Economic Analysis, last accessed April 4, 2017.)
If investors thought that an administration change and economic jawboning would awaken growth out of its decade-long slumber, think again. The last time America’s economy grew at three percent, let alone four, was back in 2005. And much of that growth was attributed to unsustainable appreciation of home prices and everything associated with it. There is no defining “growth” industry to do the heavy lifting this time. Our U.S. gross domestic product (GDP) forecast 2017 recognizes the fact that it will take much more than rhetoric to get the economy humming again.
To be fair, the administration has backed up its U.S. economic growth 2017 rhetoric by persuading several multinational companies to keep jobs in the United States. Carrier, Intel Corporation (NASDAQ:INTC), International Business Machines Corp. (NYSE:IBM), Ford Motor Company (NYSE:F), General Motors Company, (NYSE:GM) and others have all announced significant domestic re-investment or additional job creation. The attention that Trump has bestowed on this issue is genuine. He may have patched up job cuts in 2017 somewhat, but will it be enough to ignite above-trend growth? Not even close, and here’s why.
The first reason relates to the proposed tax cut package central to make four percent growth happen. Donald Trump’s plan calls for a reduction of the top tax bracket from 39.6% to 33% and, more importantly, a reduction of the corporate tax rate from 35% to 20%. The aim is to promote job creation, with companies retaining more of their earning, and, hopefully, greater domestic re-investment. In theory, this would also kindle upward wage pressure in an already tight labor market, thereby fueling downstream discretionary spending. It’s a classic circle of growth where manufacturing once again took the lead.
The problem is, the Donald Trump tax plan is more likely to be scaled back, amended or eliminated altogether.
With the failure to repeal Obamacare by House Republicans in March 2017, serious doubts about the GOP’s ability to pass major legislation has been raised. Republicans had six years to craft an alternative health care plan, and then pass it once they held majority control in Washington. That opportunity arrived on January 20, 2017, when Trump was sworn in as president. Despite all the momentum on their side, they still couldn’t make it happen. They couldn’t even bring it to a vote, despite a 43-seat advantage in the House of Representatives. And we’re to believe that everyone will agree on complicated policies like tax reform?
Even worse, the failure to repeal Obamacare has deprived Trump of the funds needed to put his tax cut proposal in motion. It would have saved $1.0 trillion, which is why Republicans chose to tackle health care before tax cuts in the first place. “That was part of the calculation of why we had to take care of health care first,” said upstate New York Republican Representative Tom Reed. (Source: “President Trump’s failure on Obamacare repeal raises doubts over tax reform,” Daily News, March 25, 2017.)
Secondly, unlike the protracted economic expansion brought about by Ronald Reagan’s tax cuts in the early 1980s, Trump has less room to maneuver. Reagan’s debt-to-GDP ratios were around 35%, with an abundance of fiscal headroom to play with. Quite the opposite situation exists today. The debt-to-GDP ratio is about 107%, which is the highest level since World War II. Everyone from Goldman Sachs Group Inc (NYSE:GS) to right-leaning think tank Tax Foundation expects deficits to skyrocket under Trump policies, even in a best-case scenario. The expansion of deficit spending is not likely to win over the many fiscal hawks in Congress.
Neither is it likely to win over the Federal Reserve.
Two Fed presidents have gone on record attempting to throw a wet blanket on the market. In a late-March 2017 interview, Boston Fed president Eric Rosengren said some asset markets are “a little rich” and “pretty ebullient.” This comes on the heels of Minneapolis Fed president Neel Kashkari’s claims that “rich asset prices are another reason for the central bank to tighten faster.” Kashkari affirmed that one reason the Fed is pushing interest rates higher—despite a lack of growth—is to tame the frothy markets. (Source: “Two Fed Presidents Warn Markets Getting “Frothy”, Valuations “May Come Down,” Zero Hedge, March 29, 2017.)
A tightening interest rate cycle is not conducive to four-percent U.S. economic growth 2017, especially when it’s primarily done to temper asset prices.
Reasons Why U.S. Economic Growth of 4% Could Be a Mere Possibility in 2017
“Mere possibility” is quite an overstatement. A “virtual impossibility” is a more accurate depiction of the likelihood of four percent GDP growth this year. Any hope of four percent U.S. economic growth 2017 died when the GOP’s American Health Care Act (AHCA) was pulled before the ratifying vote took place. With months of political wrangling ahead regardless, passage of the AHCA in late March was key for tax cuts to arrive in 2017.
Irrespective of tax cuts, a more sinister macro trend looms out the porthole, threatening to cap growth at stall-speed levels indefinitely. That is, the robotization of the U.S. economy.
Newly released research has revealed that between 1990 and 2007, 6.2 jobs were eliminated for every one industrial robot introduced into the workforce. Aggregate job losses totaled up to 670,000 in the manufacturing sector alone. Not only that, wages dropped between 0.25 percent and 0.5 percent per 1,000 employees when robots were released into a company workforce. (Source: “Six jobs are eliminated for every robot introduced into the workforce, a new study says,” Recode, March 28, 2017.)
This is concrete evidence of the deflationary headwinds that the increased usage of robotics brings to the workforce. Technology eliminates the cost of human labor. A century ago, 40% of people worked on farms, and today it’s only two percent. Technology always leads to greater production efficiency and cost reductions. Anyone who has ever purchased a television set or a cell phone knows this to be true. Technology also improves efficiency and reduces consumption in terms of fuel; hybrid and electric cars are quintessential examples of that.
While ancillary jobs are created for workers developing and servicing the new technology, those jobs only partially replace the ones that were eliminated. It makes perfect sense: why would corporations invest in new technology if it didn’t provide greater efficiency and expense reductions?
And this trend is about to kick up into high gear, touching all sectors. This will only make U.S. economic growth 2017 and beyond more difficult.
Up to 38% of the workforce could be at risk of losing jobs due to automation by 2030, according accounting giant PricewaterhouseCoopers (operating as PwC). In fact, PwC found that more jobs are actually at risk in the U.S. compared to Europe and Asia. (Source: “Watch out America, robots are coming for your jobs: Report finds 38% of US jobs will be automated by 2030,” Mail Online, March 24, 2017.)
Although Secretary of the Treasury Steven Mnuchin has dismissed fears about the effects of automation on the labor market, the results are crystal clear: automation destroys jobs and constricts wages. As a reminder, the U.S. unemployment forecast 2017 suggests that “real” unemployment could hit 30%, and no less than 95 million able-bodied workers are outside the labor force. How is any of this growth-oriented in nature?
Beyond automation, there are other factors which could torpedo Trump’s four-percent U.S. economic growth 2017 objective before it even gets started. Issues like tariffs, geopolitical flare-ups, and a rapidly aging society all loom in the background. This is reflected in our U.S. economic outlook 2017, and is just as prescient now.
In the end, I wouldn’t be surprised if Trump’s pro-growth agenda is able to forestall many of the structural economic issues facing the nation. It’s a good bet that many multinational companies will onshore jobs and reinvest back to America, bringing some economic benefit with them. If Trump had inherited Reagan’s favorable economic environment, with ample fiscal headroom and manufacturing still intact in the pre-robotics era, four-percent growth may have been attainable.
However, today’s realities are light years from those experienced in the early 1980s. Trump faces the exact opposite situation, and much more political opposition to boot. It will be a Herculean effort to obtain even three-percent GDP growth, let alone four percent. Trump cannot bend the laws of economics, however hard he huffs and puffs.
All he can do now is stem the economic tide, which in itself is no small feat.