For weeks I am struggling to come up with a post that places recent occasions and tendencies into a coherent perspective. It’s been difficult, however, since for each positive there seems to be a poor. Optimism here, pessimism there. At best, I can say that the outlook for economic growth is great Ok-not, but not awful either. Maybe more of the same: 2-3% real development. Lower tax rates have not yet created boom-time conditions. Business investment has been disappointing. Overlooked, however, is the significant decrease in regulatory burdens that the Trump administration has been able to attain.
It’s hard to quantify this, but we haven’t seen anything so positive in this field since nearly permanently. If Trump’s tariff wars can be resolved (by drastically reducing are eliminating tariffs), the overall economy has a lot of upside potential. 1) came in above goals, and the amount of real GDP in Q1/19 was modified upwards a bit within the annual revision to preceding years.
But the distribution of growth over the past 4-5 years changed, with the result that the economy was a little stronger a few years ago than we thought, and in recent quarters it’s been a little weaker. 2 is my now-famous “GDP difference” chart, updated for the latest GDP figures. The current financial expansion remains by the weakest in history far, with annual growth averaging only 2.3% instead of the 3.1% that prevailed from the mid-60s to the mid-00s.
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For the first time ever, the economy didn’t reattain its long-term growth trend following the last tough economy. 3.4 trillion by my computations. Maybe we’ll never reattain that long-term trend-who knows? But if nothing else, the chart demonstrates just how much lost income can accrue from a humble reduction in long-term trend development rates.
10,000 per person of “lost” annual income. 3 shows, real produces on 5-yr TIPS are trading just under 30 bps. As the chart suggests, that implies that the market’s estimate of the economy’s current trend rate of growth is approximately 2.4% per yr, which is somewhat significantly less than what we have seen in recent years.
The bond market, in other words, is priced to a continuation of the kind of growth we have seen over the past 10 years. Expectations of the Trump boom have all but evaporated. That may be pessimistic too, in my own view, but it isn’t all that awful either: just more of the same so-so development.
On the shiny side, there’s practically no indication of what might be looked at “overheating.” No development boom may well suggest less potential for a growth bust. 4 compares the entire year over year growth rate of the economy to the entire year over year growth rate of private sector jobs. Not surprisingly, the two tend to track one another. More jobs translate into a bigger economy. But take note the gap between your two lines, which is roughly equivalent to labor efficiency. When the economy grows faster than the growth of jobs, it can only just mean that workers are becoming more productive.
We’ve seen a mini-boom in productivity under Trump’s command, but it offers faded before 6-9 months, which is nowhere close to as strong as we have seen sometimes in the past. No doubt that it is these sorts of numbers that have put the bond market in a pessimistic feeling.
Today’s GDP statistics included revisions to past data heading back 4-5 years. One of many changes was to corporate profits, which were reduced in days gone by 1-2 years by almost one percentage point of GDP (with most of that being added to incomes). Even though significant reduction Yet, commercial income remain strong historically, well above their long-term average relative to GDP. 6 compares both major measures of corporate earnings: one, based on the National Income and Product Accounts (blue line), and the other according to reported profits per share. The former includes all businesses, as the includes only the ones that are publically held later.
The recent downward revisions to NIPA income have substantially reduced the space between the two measures. Note also that the growth of both measures has subsided quite a bit over the past year or so. Reported EPS are by only 1 up.3% annualized rate within the last six months, and NIPA profits have registered no net growth over the previous year. Does the big slowdown in profits growth mean the currency markets is overvalued? 7. The current PE ratio of the S&P 500 is under 20 just, which is only 18% above its long-term average.