Summary: American elections often turn on recent economic growth. So Trump’s future, the GOP’s future, and perhaps the course of US politics might depend on the what the economy does during the next three years. Here one of the world’s top forecasting firms looks at our future. They see slowing growth, which Trump’s fiscal stimulus (i.e., tax cuts => larger deficits) will not offset.
By Lakshman Achuthan and Anirvan Banerji of ECRI.
From Bloomberg on 25 January 2018.
Reposted with their generous permission.
Market-oriented economies such as the U.S. are inherently cyclical, and there are warnings of a cyclical slowdown in 2018. Yet this view is at odds with the increasingly optimistic consensus that economic momentum, turbocharged by President Donald Trump’s tax cuts, will sustain the upswing throughout the year.
The notion that momentum propels economic expansion — and is therefore a good way to forecast growth — is often valid away from cycle turning points. This is why extrapolating recent trends is a popular basis for forecasting growth. The exception, by definition, is at cyclical turning points, when momentum reverses. This is when gross domestic product consensus forecasts systematically exhibit their largest errors. (See “How Reliable Are GDP Consensus Forecasts?“)
Good leading indexes are designed to signal when the risk of a turning point is high, or when some of the biggest GDP forecast errors are likely. Lately, growth in the Economic Cycle Research Institute’s U.S. Short Leading Index, which we recently highlighted, has been “pointing to a U.S. growth rate cycle downturn.” (See “Bond Markets Really Are Signalling a Slowdown.“)
Prospects for a slowdown have not changed despite an even more upbeat consensus. In turn, this optimism has supported a record-breaking rise in stock prices to start the year.
The cheerful sentiment is driven by expectations the tax cuts will provide a lift not only to profits, but also to economic growth. But business investment growth in the year after tax cuts has actually been shrinking since the 1960s; President George W. Bush’s tax cut was followed by less growth than occurred after President Ronald Reagan’s tax cut, and even less than after those signed into law by President Lyndon Johnson. In any case, most estimates of the boost to overall growth from the Trump tax cuts in 2018 are in the range of some fraction of 1% of GDP.
Nevertheless, virtually everyone, including ECRI, agrees that the tax cuts will provide at least some economic boost, following the cyclical upturn during which year-over-year GDP growth probably doubled by the end of 2017 from the three-year low of 1.25% in mid-2016. The question is if tax cuts can offset the cyclical slowdown that is likely to follow.
Since the last recession, the U.S. has had three cyclical slowdowns, in 2010-11, 2012-13, and 2015-16. As the chart shows, those downturns typically reduced year-over-year GDP growth by a couple of percentage points. (Click to enlarge.)
The point is that such slowdowns tend to cut GDP growth by quite a bit more than the expected gain from the tax cut.
Looking elsewhere, could the synchronized upturn in global growth help sustain U.S. growth momentum? In theory, yes, but ECRI’s international leading indicators also point to slowing growth ahead. In fact, the growth rate of ECRI’s international long leading index — which, a year ago, correctly proclaimed the “brightest global growth outlook since 2010” — has turned down, delivering a clear message. Cyclical forces are in no position to sustain the synchronized global growth upturn that has gone on for more than a year.
Not that global growth has been providing a major tailwind for U.S. growth. Even with synchronized global growth in full swing in 2017, U.S. net imports of non-petroleum goods over the past 12 months were larger than ever. (See “Key Trade Data Shows Fast-Worsening Deficit.“)
Despite hopes that economic growth momentum from 2017 can be sustained through 2018, a slowdown is likely to take hold this year. Perhaps this is part of the message from bond market yield spreads. And even as tax cuts support growth, they will, at best, mitigate that slowdown — a far cry from current expectations.
Looking at the data, past and future
Looking back: year-over-year growth. Do you see the boom?
Look more closely at the past, at quarter-over-quarter growth. Do you see the boom?
Look at the future using ECRI’s indexes (through 19 January 2018). See more here.
The Atlanta Fed’s GDPnow forecast for Q1 real GDP.
A fever for America: Economic growth skyrockets, driven by collapse of household saving and a rising Federal deficit. The forecast for Q1 of the Atlanta Fed’s GDPnow model is 5.4%.
About business cycles
Business cycles: we had these nice cycles in the good old days.
These neat cycles might be a thing of the past, in an era of zero or negative real rates.
About the Economic Cycle Research Institute
The ECRI is an independent research institute. Their indicator systems predict the timing of changes in an economy’s direction, before the consensus of economists. It is one of the three best-known non-government publishers of leading indicators, along with the Conference Board and the OECD. The ECRI’s co-founder was Geoffrey H. Moore.
”In a sense, he was the father of the leading indicators as we know them today,” said Anirvan Banerji, co-director of research with Dr. Moore at the ECRI. The successor to the forecasting tools he developed is ECRI’s Weekly Leading Index (WLI). From 1949 to 1978 Moore set the start and end dates of recessions for the National Bureau of Economic Research (NBER). When they created a committee for this, he was its senior member. Using the same approach, ECRI has long determined recession start and end dates for 20 other countries that are widely accepted by academics and major central banks as the definitive international business cycle chronologies.” (From his March 2000 NY Times obituary.)
For More Information
Ideas! For shopping ideas, see my recommended books and films at Amazon.
- Ignore the skeptics. America can still grow.
- Today’s mythbusting: the Fed is not suppressing interest rates.
- Did anyone predict the 2008 crash? Will anyone predict the next crash?
- WWI warns us about markets’ ability to see the future.
- See the mystery of US GDP, and understand ourselves better.
To better understand what lies ahead for America…
I recommend reading The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War by Robert J. Gordon (Prof economics, Northwestern U). From the publisher…
“In the century after the Civil War, an economic revolution improved the American standard of living in ways previously unimaginable. Electric lighting, indoor plumbing, motor vehicles, air travel, and television transformed households and workplaces. But has that era of unprecedented growth come to an end?
“Weaving together a vivid narrative, historical anecdotes, and economic analysis, The Rise and Fall of American Growth challenges the view that economic growth will continue unabated, and demonstrates that the life-altering scale of innovations between 1870 and 1970 cannot be repeated. Gordon contends that the nation’s productivity growth will be further held back by the headwinds of rising inequality, stagnating education, an aging population, and the rising debt of college students and the federal government, and that we must find new solutions.
“A critical voice in the most pressing debates of our time, The Rise and Fall of American Growth is at once a tribute to a century of radical change and a harbinger of tougher times to come.”