In my meetings in London last week, many of our accounts were skeptical that the strength in the soft data in the U.S. will trickle down to the hard data until the Trump administration actually succeeds in cutting taxes and in boosting infrastructure spending.
The soft data consist mostly of surveys of consumers, CEOs, purchasing managers, small business owners, industry analysts, and investors. They all turned remarkably upbeat after Election Day, as Debbie and I have been monitoring in our new Animal Spirits chart publication.
On the other hand, a few hard-data indicators are downright downbeat. Auto sales totaled 16.6 million units (saar) during March, down from a recent high of 18.4 million units at the end of last year. Payrolls in general merchandise stores have dropped 89,300 over the past five months through March as a result of widespread store closings due to competition from Amazon (Fig. 8).
Then again, employment in construction, manufacturing, and natural resources rose 175,000 during the first three months of this year (Fig. 9). The sum of commercial and industrial bank loans and nonfinancial commercial paper has been flat since the start of the year.
A bigger question is whether there has been a structural decline in the potential growth of the economy that may defy both the animal spirits that seem to have been unleashed by Trump’s election as well as his “Make America Great Again” (MAGA) fiscal policies, assuming they get fully implemented.
If so, then the long-term trend of growth for both the real economy and corporate earnings may be lower than in the past. The good news in this scenario is that it might mean that a boom is less likely, which obviously would reduce the risk of a bust.
While much has changed since Election Day, some things have not. Demography hasn’t changed. Neither has technology. Globalization might change, but for now the world remains very competitive as a result of relatively free (though not necessarily fair) trade.
Productivity growth remains abysmal, and might improve as a result of MAGA policies, or might not.
Consider the following:
(1) Potential output. The Congressional Budget Office (CBO) calculates a quarterly series for potential real GDP growth that starts in 1952 and is available through 2027 (Fig. 10). The outlook for this year and beyond is based on demographic projections used to estimate labor force growth and assumptions about productivity.
From 1952 through 2001, potential real GDP grew in a range mostly between 2.5% and 4.0%, averaging 3.5%. Since then, growth has consistently been below 3.0%, and actually below 2.0% since Q1-2007.
(2) Real GDP. Debbie and I constructed a series for the underlying growth in real GDP simply as the 40-quarter percent change in real GDP annualized (Fig. 11). It tells more or less the same story as the CBO’s estimate for potential output. From 1960 through 1975, growth averaged 4.7%. From 1975 through 2007, it averaged 3.7%. It plunged during the Great Recession, and has remained consistently below 2.0% since Q3-2009.
(3) Labor force. Trump may or may not succeed with his MAGA plans. However, he certainly can’t Make America Young Again (MAYA). He can’t bring back the Baby Boom. There has been a dramatic slowing in the growth of the working-age population and the labor force, particularly of the 16- to 64-year-olds (Fig. 12 and Fig. 13). The actual growth rates of this age segment of the working-age population and the labor force are down to 0.5% and 0.3% over the past 10 years at annual rates (Fig. 14).
(4) Productivity. The big unknown is whether Trump’s MAGA policies can revive productivity growth. That’s the only way that real GDP growth might finally exceed 2.0%. Getting it up to Trump’s 4.0% goal seems very unlikely. Nonfarm productivity growth has been below 1.0% since Q4-2014, based on the five-year percent change at an annual rate (Fig. 15). Surprisingly, manufacturing has contributed greatly to this weakness, also rising less than 1.0% since Q4-2015.
(5) S&P 500 earnings. The potential growth of the economy matters a great deal for the stock market since it determines the potential growth of corporate earnings. Surprisingly, so far, the S&P 500 forward earnings since 1979, which is when the data start, remains on a 6%-7% annualized growth trajectory (Fig. 16). Over this same period, the S&P 500 has been tracking growth of 8%-9%, with more upside and downside volatility than in forward earnings (Fig. 17).
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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