The Factors Driving And Constraining US Economic Growth
For any economy to grow, one or more of the following things must occur:
- The Workforce must grow
- Wages must increase
- Credit must expand and/or
- Wealth must grow
In this week’s blog I would like to make some observations on each of these factors in order to highlight the constraints the Trump Administration will face as it attempts to rev up the growth rate of the US economy.
The Workforce: There has been a significant slowdown in the growth rate of the US workforce. Between 1948 and 1999, the workforce grew at an annual average rate of 1.6%. Since 2000, that rate of growth has halved to 0.8% a year. Over the next 10 years, it will slow further to only 0.5% a year, according to the Bureau of Labor Statistics. That means the economy will face significant negative demographic headwinds for the foreseeable future.
Wages: Globalization had exerted severe downward pressure on US wages for decades. In 2016, Median Weekly Real Earnings for full-time employees were only 3.6% higher than they were in 1979. In recent decades, purchasing power in the United States increased because of credit growth and inflating asset prices – not because of wage growth.
Credit Growth: Between the breakdown of the Bretton Woods System and 2008, credit grow was the main driver of economic growth in the United States. At the peak in 2007, total credit grew eight times faster than nominal GDP growth. Credit growth on that scale was unsustainable. When the private sector began to default, the global economic crisis began.
Wealth: Since 2008, wealth creation has played the leading role in driving economic growth. Household Net Worth has increased by $35 trillion (60%) from the post-crisis low of 2009. The Fed orchestrated that surge in wealth by cutting short-term interest rates to near 0% and by acquiring $3.5 trillion of financial assets with money it created from thin air.
The negative demographic trends will not be easily changed.
Asset prices (Wealth) are stretched relative to income. If interest rates rise, the price of stock, property and bonds would fall. The resulting negative Wealth Effect would likely tip the economy back into recession.
The debt of US households is still too high relative to their income to allow a new surge in private sector debt. In fact, with interest rates beginning to move higher, household sector debt growth is likely to slow or even contract. That means credit growth will remain reliant on the increase in government debt, as has been the case since 2008. Government debt has increased by nearly $10 trillion and has accounted for almost all of the credit growth in the United States since the crisis began.
President Trump’s plans to slash taxes and to greatly increase government spending on the military and on infrastructure are likely to cause a large increase in the government’s budget deficits and in government debt. That kind of aggressive fiscal stimulus would boost economic growth in the United States (if all other factors were to remain unchanged). However, if such large-scale fiscal stimulus is introduced at the same time that the US Current Account deficit is eliminated (something else President Trump has pledged to do), then the US economy would overheat, inflation and interest rates would spike, credit to the private sector would contract and asset prices would plunge. The negative consequences of (private sector) credit contraction and wealth destruction would greatly outweigh the positive benefits that would result from the fiscal stimulus.
President Trump has also pledged to force US companies to bring their factories back to the United States. If he does, then US wages would rise. Increasing wages would support higher consumption and economic growth (again, if all other things were to remain unchanged). However, increasing wages would also quickly lead to a spike in inflation and higher interest rates. That would cause credit to contract and asset prices to fall. Again, the negative consequences would greatly outweigh the positive benefits.
President Trump has said he would double the growth rate of the US economy. In the paragraphs above, I have described some of the hard economic constraints he will encounter as he attempts to do so.
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