This is an excerpt from our most recent Economic Outlook report. To access the full PDF, please click here.
With the U.S. economy clocking in an impressive growth value last seen in 2014, the question on investor’s minds is this: was that number an outlier, or should we get used to it? That is, will this administration be indeed able to deliver sustained growth rates above +3.0% as promised? Or is this the proverbial ‘sugar high’ caused by temporary effects, through policies that will eventually subside or reverse, and leave us with the ‘secular stagnation’ predicted by Harvard economists Larry Summers? This is an environment with low growth rates, where increases in growth can only be achieved through unsustainable policy measures.
Zack’s economists do view the short-term uptick in U.S. growth as in-line with expectations of a stronger U.S. labor market, with a modest impact of tax cuts working their way through the economy. Consumer spending increases need to be named as the main contributor, as after-tax income and wealth increased. Fewer people are unemployed than ever before, as the U.S. labor market continues to pull in unemployed workers from those who were on the sidelines.
However, we also agree with analysts suggesting a one-off factor contributed --- namely trade wars. With growing concerns of a potential increase in tariffs across the board, companies and countries were preempting a surge in prices by piling up on products and increasing inventories. This effect emerged from both trade directions, imports and exports. The impact on increasing net exports had a significant effect on last quarter’s GDP growth rate -- up to 1.5% basis points based on our estimates.
Going forwards, trade tensions (if they manifest in actual policies) will contribute to higher readings on consumer price inflation. So far, trade talks are mainly focused on industries focused on production. It won’t be out of the question for consumer goods to be targeted next. While the former traditionally take a while to translate into final price inflation, consumer goods typically contribute to higher readings in aggregate prices rather quickly. Any signs in higher inflation will subsequently reaffirm the Fed’s rate hike plans and will slow down the growth momentum.
Hence, maintaining growth in the long run through current channels would require a perpetual cycle of repeated tax cuts and ever widening budget deficits.
The key to affecting long-term growth, however, remains a revived increase in capital investments. These eventually lead to increased productivity. While individual industries might note increases in capital expenditure, the aggregate picture is not as clear.
Empirical evidence for an increased capital expenditure across the board remains elusive so far.
Whether a soft rebound in labor productivity we saw last year (in the Private Non-farm Business Sector Labor Productivity chart below) can be maintained will depend to a large degree on the ability to create incentives for companies, not only to hire more, but also to invest in capital. That will make workers more productive.