Stock investors have four major reasons to worry about the outlook for the U.S. economy, the key driver of the market, according to the Wall Street Journal. The four problems are: historic limits to growth, debt burdens, low investment, and an aging labor force.
Limits to Growth
History shows that growth typically accelerates only in the early stages of an economic cycle, and that President Trump’s deregulatory and tax cutting programs, if they are enacted, would do little to deliver his goal of 3%-4% annual GDP growth at this late stage. In fact, there are only a few instances since the 1980s in which advanced economies were able to increase their annual growth rates by one percentage point or more per year over a sustained period, according to analysis by the International Monetary Fund (IMF) cited by the Journal. Moreover, most of those episodes occurred in the 1990s, during periods of recovery after recessions and against a background of strong worldwide growth.
Gross U.S. public debt is projected to soar from around 106% of GDP today to about 117% in a decade, strangling economic growth and private lending. The Journal notes a general imperative in Washington to reduce the federal budget deficit and rein in the growth of the federal debt. However, this is at odds with Trump’s expansionist program of infrastructure spending. Meanwhile, high levels of consumer debt may be putting a brake on personal consumption expenditures. (For more, see also: Why Consumers Are the Biggest Threat to the Economy.)
The U.S. economy already is burdened by low rates of investment and low productivity, which limits prospects for future growth. But, partly due to the debt burden, the country is constrained in its ability to ratchet up spending on digital and physical infrastructure in amounts sufficient to boost productivity significantly. Both technological advances and productivity increases were key contributors to past instances when GDP growth accelerated, the Journal observes.
Aging Labor Force
Economic growth normally depends, in part, on an expanding workforce. However, the U.S. labor force is aging, population growth is slowing, and the Trump program includes a clampdown on immigration that would exacerbate the problem. Indeed, expansion of the labor market and higher productivity have been key drivers of GDP growth in advanced economies studied by the IMF, the Journal notes. (For more, see also: Depression-Era Headwinds Restrain the Economy.)
But Expansion May Linger
The current U.S. economic expansion, which began in July 2009, is the third-longest since the late 1940s, according to Barron’s. The longest lasted 10 years in the 1990s. The current expansion has been the slowest of the 12 in that era, averaging just 2.1% GDP growth per year. However, Barron’s adds, its longer duration means that its cumulative increase in U.S. GDP exceeds that attained in the previous expansion, which lasted six years.
Meanwhile, one body of research indicates that the current expansion may be able to last for another two years. Carsten Valgreen, an economist and partner at Applied Global Macro Research, finds that recessions typically occur within five years after the profit margins of non-financial corporations peak during an expansion, Barron’s reports, adding that the peak was attained in the third quarter of 2014. Given the slow and steady pace of the current expansion, it even may last into 2020, Barron’s opines, on an optimistic note.