Thursday, November 2, 2017

"solid growth"

In an article titled US economy on solid growth path (27 October 2017) we read:

For all of 2017, forecasters believe the economy will grow at an annual rate of around 2.2 percent, rising to 2.4 percent next year. That would be an improvement from the meager 1.5 percent in 2016, but would still fall below the expectations of the Trump administration.

2017: 2.2
2018: 2.4
2019: 2.6
2020: 2.8
2021: 3.0
2022: 3.2
2023: 3.4
2024: 3.6
2025: 3.8
2026: 4.0
2.2 percent? Whoop-de-doo. And 2.4% next year. This is "solid growth"? Let's see, at this rate, a zero-point-two percent per year increase, we could reach 3% annual growth by 2021, and 4% growth in the middle of Trump's third term!

A solid growth path, my ass.

Actually, the numbers are better than indicated. The forecasters are undershooting. The article tells us

The US economy grew at a steady annual rate of 3 percent in the third quarter, marking the first time in three years that economic expansion hit at least 3 percent for two consecutive quarters

Graph #1: Real GDP Growth

They also note that

Consumer spending slowed to 2.4 percent growth in the third quarter. But that was offset by a strong 8.6-percent gain in business investment in equipment.

The investment number sounds good, but it sure could be better:

Graph #2: Real Business Investment in Equipment
You would have to ignore a lot of data to say we have a rising trend. But don't forget, we're also ignoring future data: data we don't have yet. I expect further improvement.

Actually, I wouldn't be surprised to see a spike in investment, similar to what happened after the 1982 recession. Back then, everyone was excited about the possibilities that came with President Reagan. As Graph #2 shows, investment growth fizzled out quickly, back then; but expectations did create a big, brief burst.

There's a lot of covert excitement these days, what with all the economic changes promised by President Trump. That excitement will become less bashful as the economy improves. The more visible excitement will amplify expectations. Thus I expect an investment spike, a Trump spike comparable to the Reagan spike.

Combine the expectations effect (as in the 1980s) with the effect created by a reduced accumulation of debt (as in the 1990s) and you should get a decade or so of impressive economic growth: maybe 4% in Trump's first term.

As I've been saying. But don't make the mistake of giving President Trump all the credit for the economic improvement. Trump gets credit only for the shock to expectations. The longer-term improvement is due to the drop in debt growth since the crisis, and the greater quantity of circulating money.

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