2018 – The best growth in a generation & the ultimate economic teachable moment
Bottom Line: Kayne West topped the charts with Gold Digger. In the aftermath of hurricane Katrina, he’d just informed us that George Bush doesn’t like black people. In the aftermath of a record setting two-year hurricane cycle South Florida’s official roof color was blue. The housing market was on fire and to get a loan all you had to do is say you could afford it. The year was 2005. It was the last year we had a full year of an average American economy. The US historic average growth rate is 3.1%.
We’d lived through twelve consecutive years without it. A combination of a debt crisis leading to the Great Recession followed by an administration that raised taxes and regulation strangling economic growth, we’d waded in pathetic 1.8% average growth. Because the economy was so tepid a generation of young adults found it hard to get a job or at least one that they could consider a career. But even then. Wage growth? Raises? Bonuses? Not a chance. Employers were battling the impact of health insurance premiums rising by 90% over six years and using those resources to keep benefits available to employees – which were mandated under law. But then enter the Trump economy...
With yesterday’s 4th quarter GDP report in hand the US economy completed the year with a 3.1% growth rate. What so many – except me – said couldn’t be done.
It just so happens that I tackled this topic most recently two years ago today in the Q&A of the day. I’m going to walk you back through that story which illustrates the arguments previously used to say it couldn’t be done and a refresher about how we arrived at the best economy in a generation...
Q&A: Is a 3% growth economy still possible? - March 1st 2017
Today's entry: Hi Brian, I have a question I hope you can answer. Ever since President Trump stated that his goal for economic growth was over 3% I've heard a bunch of so called experts come out and say it isn't possible any longer. I remember you saying that it hasn't happened in over ten years so is it still possible and are these experts really just critics of Trump?
Bottom Line: Candidly, I've been somewhat surprised to hear a person or two that I have enormous respect for suggest that it isn't possible (like the legendary Jack Bogle - Founder of Vanguard). But to cut right to the chase... Yes - it's possible. It's just math. As you eluded to the last year that the US economy grew at a 3% or better rate was 2005. As I've recently demonstrated, the average historic growth rate of the US economy is 3.2%. So, in other words we haven't had even an average year of economic growth in nearly over 11 years. It's true that the larger an economy is, the harder it is to sustain a higher growth rate going forward. But this is just math after all... I'm using round/approximate numbers for what drives the US economy:
- Consumer spending: 70%
- Business spending: 20%
- Government spending: 10%
You get the point that the consumer is clearly the most important ingredient to the US economic growth rate. The first headwind to improving the US consumer growth rate is the population growth rate. The historic average US population growth rate through the year 2000 was 1.2%. Aside an aside there's only one year in recorded American history with a negative population growth rate (1918 - WWI effect). Since 2001, we've not had even one year with a growth rate of 1%. As of February 1st of this year (2017), the year over year population growth rate was .69%. So, the decrease in population growth is two-fold. First, it's one of the basic economic arguments for increasing legal immigration into the US. The macro trend has been that as women have become equal players in the work force family sizes have been falling. That's unlikely to reverse based on all current trend lines. It also means that what used to mean that the economy would grow at 1.2% per year by default (all other factors being equitable) that's been cut in half...But now for the most important factor of all. Labor participation and income growth.
Here’s a link to the original story: https://ihr.fm/2EGfULz
Part 2: Q&A: Is a 3% growth economy still possible? From March 1st 2017
Bottom Line: In 2005, when the US economy last had a 3%+ growth economy the labor participation rate averaged 66%. Today it's at 62.9%. That difference of 3.1% is huge when we're talking about obtaining 3%+ economic growth. While those who aren't in the labor force are still spending some money, you certainty can't expect them to be increasing their spending meaningfully after dropping out of the work force. That creates a natural drag on consumer spending. The biggest factor of all though comes down to real median incomes. In 2005 the median household income was $46,242 - Today it's $56,224 While that might sound OK on the surface here's the issue. If incomes had grown at 3.2% per year (the historic average) - that $46,242 income in 2005 would be $65,750 today. That's more than $10,500 less earnings power today due to the weak income growth of the previous 11 years. So, here's the bottom line...
Population growth is a slight headwind but if we were to improve the labor participation rate by 3%+ to reach the typical rate and if real incomes were to grow by 3%+, you'd have more than enough firepower to achieve 3%+. As for business and government spending... You can rest assured that if consumers were earning/spending that much more businesses and governments would be following suite.
Here’s a link to the original story: https://ihr.fm/2tJ8H77
And for those who’ve heard me for a decade or longer describe the difference in economies based on growth rate – here's a refresher that’ll make perfect sense in context. I shared this with you most recently on July 31st of 2017...
In my analysis, (and view) of the economy, there are three critical economic growth levels that project what we can expect economically in United States. They are…The 1% growth economy, the 2% growth economy and the 3+% growth economy.
- The 1% growth economy is one which places the economy at imminent risk of recession and isn’t producing new employment or income growth
- The 2% growth economy is treading water. This economy will generally only keep pace with inflation making it difficult to achieve upward mobility in employment and income growth
- The 3%+ growth economy, which if sustained, produces a steady stream of new employment opportunities and significant opportunity for income growth
Here’s a link to the original story: https://ihr.fm/2H9k0xo
Does it all make sense now? Consider the source for information. Agree with me or don’t agree with me – it's ok. I’ll always tell you the truth. I’ll be analytical and I’ve not made a career out of being wrong.