It seems to me….
“We could solve all our problems if only we were the efficient, rational human beings of standard economic theory and had politicians willing to think in the long-term interest of their people rather than their own.” ~ Jeremy Grantham.
My basic undergraduate business and economics classes (in which I less than excelled) were back in what now is considered by many to be the dark ages. Granted I have since read a small amount on those topics but they remain considerably out of my field of expertise. That has never previously discouraged me from expressing my opinion on a subject and probably never will. So….
The U.S. economy currently appears to be strong and has continued its growth following recovery from the 2008 economic crisis. The basic foundation created under President Obama was sufficient to have, at least so far, withstood all possible challenges. It is totally understandable that while Trump desires to claim credit for this growth, the most he can actually claim is not yet having managed to end it.
Most investors and analysts continue to report strong confidence in the U.S. economy. While confidence continues to build confidence, there must eventually be an end to any such period of extended growth. For now, there are many alarms but nothing indicative of an impending adjustment.
The U.S. economy grew at a 3.2 percent annual rate in the 2019 January-March period, the strongest pace for a first quarter since 2015. That said, the growth was led mostly by factors that could prove temporary; a restocking of inventories in warehouses and on store shelves and a narrowing of the U.S. trade deficit. By contrast, consumer spending and business investment, which more closely reflect the economy’s underlying strength, were relatively weak.
Labor has traditionally been an economy’s most important resource – first the good news. The unemployment rate in April 2019 fell to a five-decade low of 3.6 percent from 3.8 percent though that drop partly reflected a rise in the number of people who stopped looking for work. Most job growth occurred in services which includes both higher-paying jobs in information technology and lower-paying temporary work. Average hourly pay rose 3.2 percent from 12 months earlier – a strong increase matching the increase in March.
Still, it seems quite likely that Trump’s current political motivated expansionary policies are for unrealistic and unsustainable increases in the economy. Such policies often result in short-term political benefit though an inflationary gap can occur when actual aggregate production output exceeds potential output. These policies possibly could eventually result in higher inflation that might be difficult to control since the national debt/GDP ratio, which is already excessive, also continues to increase. A nominal debt/GDP ratio of 60 percent is often considered a prudent limit for developed countries – the current U.S. ratio is in excess of 105.3 percent and Trump continues to push for additional spending without any corresponding tax increase to pay for it.
There are numerous difficulties that can result from excessive national debt such as loss of confidence in monetary creation policies or by simply “crowding out” where the government competes with private corporate needs for investment financing resulting in increasing interest rates and a correlated decrease in corporate expansion.
The Federal government must essentially purchase the nation’s way out of any sufficiently serious crisis such as happened in 2008. Primary options include either a monetary policy implemented by the Federal Reserve of managing the short-term interest rate level affecting the overall availability and cost of credit in the economy or through Congressionally approved fiscal policy adjustments such as taxation changes or direct purchase of goods and services by the government that put money directly back into the economy, which has the greatest multiplier effect but takes substantially longer to implement.
The U.S. is not sufficiently prepared for any possible downturn at this time. The federal financial interest rate is much too low for rate reductions to provide sufficient stimulus while avoiding a potential liquidity crisis as occurred in 2009. Qualitative easing, the only other alternative, would significantly further increase the national debt. The U.S. economy is obviously sufficiently overheated that the Federal Reserve should continue rate increases.
Other additional considerations that should be affecting the economy do not seem to be having any appreciable affect though the actual reason is not readily apparent.
While not directly specified, the short-run Phillips Curve implies an inverse relationship between unemployment and inflation which should be relevant to policymakers who need to consider potential trade-offs between the two given delays inherent in any attempted Federal economic corrections.
The Non-Accelerating Inflation Rate of Unemployment (NAIRU) is the unemployment rate consistent with maintaining stable inflation. According to standard macroeconomic theory, the short-run Phillips Curve predicts inflation will tend to rise if the unemployment rate falls below the natural rate. The NAIRU is difficult to model and changes over time but models that allow the NAIRU to vary generally have greater predictive power for inflation and wage growth.
Some estimates of the NAIRU from the model, as well as the uncertainty around these estimates, are that the NAIRU peaked in 1995 at just over 7 percent of the labor force and has declined more or less steadily since then to around 5 percent in early 2017. The actual U.S. unemployment rate was 3.6 percent in April 2019; the last time it was at 5 percent or higher was in January 2016. It obviously has been well below the theoretical NAIRU for a significant length of time.
U.S. inflation was 2.93 percent in January 2019 and 2.87 percent in February. With both inflation and unemployment having been well below theoretically desirable levels for this long, it is not apparent why inflation has not appreciably increased as theoretically predicted.
Three possible reasons for the current relatively slow growth in inflation are: a higher number of long-term unemployed who left the labor market following the 2007 recession than was previously realized and only now are once again seeking employment, impact of post-industrialism, or consequences of economic inequality. It most likely is the result of a combination of the last two: changes resulting from post-industrialism and growth in economic inequality.
The U.S. has transitioned from a manufacturing-based economy to a service-based economy becoming the first nation with greater than 50 percent of its workers employed in service sector positions. Such postindustrial societies transition through subsequent related societal restructuring. This transition is similar but occurring more quickly than a similar transition at the start of the Industrial Era: it is obviously impacting our economy in ways not yet fully understood.
The U.S. has the mixed fortune of leading the world in not only manufacturing output but also productivity growth (though productivity growth contracted starting in 2016). Manufacturing jobs, which at one time provided substantial employment opportunities for middle and lower-class workers, have gone from about 30 percent of total employment in the early 1950s to just over 8 percent at the end of 2016.
Robotics and automation have been linked to those lost manufacturing jobs. The addition of one robot per 1,000 workers reduces the employment-to-population ratio (the number of people actually employed in an area divided by the number of people of working age) by 0.18 to 0.34 percentage points and reduces wages by between 0.25 and 0.5 percent. On the low end, this amounts to each new robot replacing around three workers. The impact is most pronounced in manufacturing (particularly in the production side of the auto industry), electronics, chemicals, and pharmaceuticals among others.
The labor market for college-educated workers remains extremely strong and they continue to be well paid. Occupational opportunities available to people without a college education have dramatically contracted as a result of various factors but automation has been the primary reason. The decline of earnings and fortunes of people without college degrees is an important aspect of the increased economic inequality observed over the past several years.
Manufacturing job opportunities have improved for skilled workers, especially for those with advanced degrees, even as overall manufacturing employment has fallen – primarily for those with only a high school degree or less. Manufacturing is becoming a highly skilled occupation that requires less manual labor but increasingly needs multi-skilled workers rather than the low-skilled workers who in the past filled most of those positions. Unemployed low-skilled workers who find jobs are likely to only find jobs at declining pay levels as a higher number of potential workers are competing for a decreasing number of openings.
The U.S.’s extremely high rate of economic inequality (the U.S. Gini index is 41.5) is also a contributing factor whose importance needs to be better understood. The U.S. has become a highly bifurcated society based primarily on educational attainment: high education, high income; low education, low income.
The credentialed elite, composed of the top 20 percent of the working population in income, mostly includes those with technical or professional degrees and business owners who continue to enjoy ever greater opportunities. It is not just about getting a college education to be sufficiently credentialed to command high incomes, it also is about getting the right education and training that fits the new economy. This inequality is self-perpetuating as those with high incomes are able to additionally increase their wealth through surplus income investment. Such rentier capitalism increases capital flow to physical factor owners and away from lower-income workers serving to somewhat moderate inflationary pressure.
Somewhat troubling is that the economy under Trump is following a pattern similar to that under President George W. Bush: leveraged lending has risen under Trump while regulations have been rolled back; both Bush and Trump cut taxes and increased deficits during times of low unemployment contrary to standard theory. Hopefully the results will be different as Bush’s Presidency ended in a global financial crash and worldwide recession.
Something obviously needs to be done. While the combined goals of both extremely low unemployment and low inflation are admirable, at a sufficiently low level they are misguided as eventually one will preclude the other. If current policies are permitted to continue over sufficient time, we eventually will have neither.
Another U.S. downturn could also be problematic for other nations whose economies generally follow that of the U.S. There are very good reasons for concern in addition to Trump’s policies – the U.S. economy has been growing for 10 years and recessions become more likely as expansions continue. Given how long the current expansion has lasted, the probability of the U.S. entering a recession within the next year is estimated to be in the 30-40 percent range.
The U.S. economy is large and similar to a large ship; difficult to quickly change course. Being slow to react to change, careful planning and consideration of potential results of any action is necessary. That does not seem to be occurring with current U.S. economic policies which appears to be ignoring potential long-term consequences. Current policies either appear to be either pushing us toward an economic slowdown or at least not adequately preparing us for one.
That’s what I think, what about you?
 Robert Jeremy Goltho Grantham CBE is a British investor and co-founder and chief investment strategist of Grantham, Mayo, & van Otterloo, a Boston-based asset management firm.
 Rugaber, Christopher. Unemployment Hits 49-Year Low As Employers Add 263,000 Jobs, Time, http://time.com/5582712/unemployment-rate-low-new-jobs/?utm_source=time.com&utm_medium=email&utm_campaign=the-brief-pm&utm_content=2019050318pm&xid=newsletter-brief, 3 May 2019.
 Hawtrey, R. G. Milton Friedman And The Phillips Curve, Uneasy Money, https://uneasymoney.com/2018/01/12/milton-friedman-and-the-phillips-curve/, 12 January 2018.
 White, Gillian B. How Many Robots Does It Take To Replace A Human Job?, The Atlantic, https://www.theatlantic.com/business/archive/2017/03/work-automation/521364/, 30 March 2017.
 Portier, Franck. The Next US Recession Is Likely To Be Around The Corner, Centre For Economic Policy Research, https://voxeu.org/article/next-us-recession-likely-be-around-corner?utm_source=Fareed%27s+Global+Briefing&utm_campaign=338b2fc404-EMAIL_CAMPAIGN_2019_05_03_09_20&utm_medium=email&utm_term=0_6f2e93382a-338b2fc404-85658801, 3 May 2019.