May 2018 Economic Overview

U.S. economic growth cooled last quarter. Consumers pulled back following outsize spending in the prior period, though solid business investment cushioned some of the weakness and employee-compensation costs accelerated amid a tight job market. These results underline the difficulty of achieving Trump’s goal of 3 percent sustained growth, despite corporate and individual tax cuts that went into effect in January. Other figures on Friday cast a shadow over the strong, synchronized global upswing: Europe’s economy lost momentum in the first quarter as expansions slowed from the U.K. to France, partly because winter storms.

Consumer spending, the biggest part of the economy, rose 1.1 percent, matching estimates and marking the smallest gain since 2013. Business-equipment spending and residential investment also slowed. The tax cuts, focused on corporations and the wealthy, kicked in on Jan. 1, and employers adjusted worker paychecks to reflect the lower tax rates in February. But two recent polls have shown a slim majority of Americans said they haven’t notice an increase in take-home pay. The White House has estimated average annual household income would increase $4,000, factoring in economic growth and companies using their tax savings to increase wages. But the nonpartisan Tax Policy Center estimated that the figure would be $1,600 this year — and just $930 for middle-income households. Trump strongly criticized former President Obama for not having a single calendar year in which economic growth hit 3%. In fact, Obama presided over growth of 2.9% in 2015 and three 12-monthly periods during his administration in which growth exceeded 3%.

Trump‘s antediluvian trade policy seems bent on our destruction. He makes threats, strike deals and declares victory. Unfortunately, His mercantilism seems to be gaining steam. Foreigners have duly queued up to sue for peace. Vindication? Far from it. No deal has yet been done with China. The danger of a trans-pacific escalation remains real, partly because of his character. If he wins one fight, he is likelier to start another. His policy seems to be founded on wretched economics and dangerous politics. He is obsessed with our trade deficit which is bilateral. His bluster cannot change basic economic logic: Tariffs bring trade into balance only if they somehow encourage national savings or reduce investment. If America slaps taxes on Chinese goods, China will buy less of them and the deficit will shrink. But, unless Americans change their total spending and saving, China will just buy more from elsewhere.

The president’s fundamental error is to see trade as a zero-sum game. To him, exporting is winning and importing is losing. Gains from trade come from the specialization permitted by the free exchange of goods, capital and know-how. This partially explains why his politics are so irresponsible. Rather than work within the rules-based system of trade, much of which was America’s creation, he bypasses at will. Managed trade is a mistake, not a victory. It substitutes power of political lobbies for market forces, favoring well-organized producers over silent, disparate consumers. His approach threatens to leave everyone much worse off. Yet, global trade has proven itself to be remarkedly resilient.

China has signaled that they are not about to back off. Its steel and aluminum exports to us amounts to less than 0.03% of its GDP, is not even a rounding error. Trump’s request that they cut their trade surplus by $100 B is risible. An investigation of their Intellectual-property practices is almost completed and Xi Ping surely wants to show that he is no pushover. Worryingly, each side thinks that in a trade war of attrition, it would have the advantage. This has all the makings of a lose-lose battle.
Most presidents, after their honeymoon, something happens because all of the things that they are planning to do politically, do not happen overnight.

Consequently, when the honeymoon period is over these presidents have a bear market. The biggest question mark is the impact on markets when investors realize that the federal government’s annual budget deficit is set to rise to more than $1 trillion in 2020, as estimated by the Congressional Budget Office. In a decade, the public debt will almost match the size of the US economy, bigger than at any point since after WW II and well past the level that worries economists.

Trump believes that his new tax law will push economic growth above 3% a year, generating more revenue than the tax cuts cost. But the Budget Office estimates the economy to grow at an average rate of 1.9% over the next ten years.

April 2018 Economic Overview

The current Republican regime will run a deficit in 2019-2020 as large as Obama’s. America is wandering into uncharted territory. “The economic outlook has strengthened in recent months,” The Fed said, Recently, and raised its rate by a quarter point to a range of 1.5-1.75%, a neutral range, a range that neither boosts nor slows the economy. Implication is that the cycle could go on longer than previously thought. There are two ways things can go wrong: the government outbidding the private sector, thus crowds out business. Lenders make the government pay higher rates to compensate for the risk of a default. This could tip government into a fiscal crisis. The government must then adopt draconian austerity measures.

There is reason that this orthodoxy may not apply. Our fiscal expansion occurring when the global financial system has had an insatiable appetite for safe government debt. Our government is nonetheless among the safer ways to meet the world’s need for safe assets.
This clearly can lead to more trouble in future, by deepening the world’s dependence on treasuries. Today’s rising debt seems likely to be used to justify future austerity, say, when control of the government swings back to the Democrats. America may regret its abandonment of budget principles. An overheating economy stems from an expansive fiscal policy at a time of full employment. An overheated economy would trigger monetary policy discipline and plant seeds of recession. Whatever turns the Fed unfriendly would likely be sufficient to derail the US equity market. But for now, we continue to expect the Federal Reserve to remain friendly to risk markets for a while longer.

March 2018 Economic Overview

Volatility is back. With a vengeance. The stock market rose steadily without a sell off until it abruptly ended in the second week of February, when the bottom fell out. Then resumed its progress from a lower level. Wage growth accelerated; the VIX, an investor expectation barometer, spiked from 14 to 37- an alarm bell high. The world nerves frayed. Implying that a transition is underway where growth causes inflation to replace stagnation as investors’ biggest fear. This shift is being complicated by an extraordinary gamble in the US. The enacted tax cuts are adding a hefty fiscal boost to juice up an expansion which is already mature. Public borrowing will double to $1 trillion, or 5% of GDP. The team steering this experiment is the least experienced in recent memory: Trump and his new Fed Chairman. Boom or Bust it is going to be a wild ride.

The world economy continues in fine fettle, buoyed by a synchronized acceleration in America, Europe, and Asia. Collateral damage to other markets was limited. Yet this episode of correction does signal what may lie ahead. The loose money policy is being dismantled. Stock markets are in a tug of war between strong profits, which warrant higher prices and higher bond yields which depress the present value of earnings. Tension is the return of monetary policy to normal conditions. What is not inevitable is the scale of the US’ impending fiscal bet. Economists reckon that Trump’s tax reform will jolt growth at most 0.3%. And Congress is about to boost government spending. The mood of fiscal insouciance in Washington DC is troubling. We are being more profligate than at any time since 1945.

This cocktail of expensive stock market, maturing business cycle and fiscal largesse would test the mettle of any experienced policymaker. Instead the policy is being bought by people who claim deficits do not matter. And the Fed has a brand-new boss who has no formal experience in monetary policy.

We must get to grips with our fiscal deficit otherwise, interest rates will soar. Mr. Powell must steer between two opposite dangers: Dovish where he hesitates to gradually tighten rates to avoid creating a bubble; the other is to tighten too tight, too fast which would be a mistake. First, it is far from clear if the economy is at full employment; second, the risk of a sudden burst of inflation is limited; Third, there are sizeable benefits to letting the labor market tighten further.

The fiscal stimulation of the scale that Trump is putting in place is poorly designed and recklessly large. Financial market Volatility will be the new normal. Hopefully the Fed will not lose its head.

February 2018 Economic Overview

The economy’s vital signs are stronger than they have been in years. Companies are posting jobs faster than they can find workers to fill them. Incomes are rising. The stock market sets records seemingly every month. As noted previously, the market is up about 30% since Trump’s election. It is up over 200% since 2009, when Obama was inaugurated. In recent Quinnipiac Poll, 66% of people feel the economy is “Excellent or Good.” That is the highest number ever recorded by this poll, Trump tweeted. In fact, this is the third-strongest bull market since 1929. Strong earnings and an accommodative Federal Reserve providing ultra-low interest rates continue to provide the impetus. With savings accounts and bonds offering such paltry returns, investors have little incentive to switch out of stocks. Trump’s push for deregulation and tax cuts has had an effect. Tax cuts for corporations could continue to boost stock market prices since lower taxes boosts profits and lower taxes encourage US-based multi-nationals to bring home foreign earnings. But history suggests they will use much of it to buy back their own shares which helps drive ups share prices. The present boom has been unusually long. 2018 is likely to be another year of declining US Dollar, primarily because it is a sign of the burgeoning health of other countries’ economies. Since global world health is buoyant few countries seem to mind if their currencies rise.

We must mention some items of concern, however: US auto sales fell 1.8% in 2017, ending seven years of growth. Trump’s massive tax package aims to stimulate business, as well as tariffs, meant to protect them. He blamed technology and globalization for jobs losses. Recent history of consolidations has played a much larger part. Banking for example, where regional banks have been replaced by larger rivals. There were 4,938 commercial banks end of 2017. In 1984, there were 14,400.

With those banks have gone local branches, well paid jobs and also the social capital that comes with local banking teams that live in communities they service, lend to and interact with. Replaced they are, by low-wage jobs from large companies such Wal-Mart and Amazon.

January 2018 Economic Overview

US economy is in good shape and likely to remain that way throughout 2018. Business confidence is high and jobs are plentiful. Unemployment is 4.1%, lowest in more than a decade and wages are growing. In spite of Trump’s claim, he was lucky in his inheritance. The market is up 25% since his election, but it is up 195% since 2009! Unemployment under Obama fell from 10% to 4.7, then to 4.1% under Trump. The economy is not in danger, but the maturity of the business cycle makes a nonsense of Trump’s trumping his authorship of economic success. For a year we have participated along with Europe and Asia in a synchronized global expansion. Should it continue, it will be the second longest expansion, EVER.

Evidence of overheating is scant. Here is the shade- the longer the expansion, the higher the likelihood of companies are to automate. They have the incentive to do so. It is harder now for industry to find additional workers. America is not about to return to pre-2005 productivity rates. Regardless of the tweeting Trumps does. Policy makers are going to regret the tax cuts they are enacting. They are squandering much needed revenues. Interest rates will peak at much lower levels than in the past but the immediate outlook is sunny.

Putin is playing Trump as if he were his asset. China looms over the West, particularly the US. It is conquering minds as well as territory. Australia was the first to tackle sophisticated foreign efforts to influence lawmakers. Not much later, Germany accused China of trying to groom its politicians. China’s sharp power as in using elbows, in contrast to soft power which is more cultural, helps their authoritarian regime coerce and manipulate opinion abroad. West must find a statesmanlike middle ground starting with an understanding of sharp power and how it works.

China’s sharp power uses a series of interlocking steps: subversion, bullying and pressure to promote self-censorship and pressure. Sometimes it is blatant as with China punished Norway for awarding Nobel prize to a Chinese Activist. Western professors have been forced to recant and some have lost access to Chinese archives. Because China is integrated into economic, political, and cultural life, the West is vulnerable to such pressure. West may value trade over principal. China has been active for decades in Africa and its citizens chafe under the saddle.

China wants to shape rules of global engagement, rules created by the US and Trump could care less! He is more worried with building walls and less about trade.
The West must make room for China’s ambitions, but that does not mean anything goes. Counter-intelligence, the law, and an independent media are the best protection. Unleashing a witch hunt against the media or against Chinese people would be wrong. Politicians calling for tit-for-tat reciprocity in any regard would be self-defeating. West must stand by its own principles and not be spooked by the West losing power to China’s emerging power. We must use our own values to blunt China’s sharp power.

December 2017 Economic Overview

Fed Chairman Janet Yellen is still inclined to raise interest rates gradually seeking to balance the risks of moving too fast or too slowly. The Fed is widely expected to raise its benchmark rate by a quarter of a percentage point at its final policy meeting of the year in mid-December. The rate now sits in a range of 1 percent to 1.25 percent.

Unemployment has fallen to 4.1 percent as of October, which the Fed regards as a little lower than the minimum level that can be sustained without spurring inflation.

On the other hand, the Fed sees little reason to rush. The economy is not overheating, inflation is below 2 percent, and the Fed does not want to stall growth.

Candidate Trump made aggressive claims about growing the U.S. economy. In a speech to the Economic Club of New York on Sept. 15, Trump asserted that his economic plan would raise U.S. gross domestic product (GDP) by more than 4 percent per year. The next month, he stepped up that claim during the third presidential debate saying: “And I actually think we can go higher than 4 percent. I think you can go to 5 percent or 6 percent.”

For the record, the United States has not seen consistent economic growth of 5-6 percent since the 1940s, or 4 percent since the 1950s and 1960s. Growth in the 1970s, 1980s and 1990s was only slightly above 3 percent. Since 2000, it has been less than that, at 1.6 percent. For the next decade, the nonpartisan Congressional Budget Office (CBO) has projected U.S. GDP growth of approximately 2 percent per year.

Trump’s proposed fiscal policy of tax cuts and increased government spending are not likely to result in a sustained increase in GDP expansion. We would like to be wrong on this point, but to date we evaluate Trump’s fiscal proposals as unlikely to overcome major headwinds of high debt, low productivity growth and stagnant workforce growth. The latter two have not generally been negative headwinds, but rather have been strong tailwinds for growth for most of U.S. history — so strong that the pernicious negatives of debt were masked when debt-to-income levels were lower than exist today.

U.S. private debt relative to GDP has been increasing almost steadily for the past 65 years. Since 2000, government debt has also surged. This has resulted in total U.S. private and federal government debt accumulation in excess of $58 trillion, about equal to three times annual GDP or income. A major red flag is that the recent growth rate of total debt continues to exceed the growth rate of nominal GDP, signaling subpar investment outcomes and the burdensome weight of the accumulated debt load. Our worry is that Trump’s fiscal expansion will exacerbate this debt cycle and actually work to suppress long-term economic growth.

November 2017 Economic Overview

University of Chicago Professor Richard Thaler was awarded the Nobel Prize for Economics for challenging the traditional idea that free markets reflect self-interests of rational individuals. They do things contrary to their own good. He created a new field called ‘Behavioral Economics’ which looks for ways governments or companies ‘nudge’ people to take actions for their long-term interests. Society relies on traits of character in a society. And in America we are experiencing less crime, but people are more scared. Contrary to Trump’s portrayal of ‘American Carnage,’ we are experiencing the paradox of fear. From ’93 to 2014, Americans became 62% less likely to become the victim of a violent crime. Persons aged 12 and older, per 1000 persons, victimhood dropped from 29.3 to just 11.1 in that period. So far for 2017, we are on track for the second lowest rate of victims any year since 1990. The paradox, it that in spite of the facts of safety, many Americans are convinced that crime is growing…Thank you Mr. Trump and for your rhetoric. Is increased domestic manufacturing a possible answer? If we could find properly trained workers manufacturing might prosper. However, studies show that the majority of past factory jobs losses were the result of investment in automation, which continue to pay off. American manufacturing has more than doubled output in real terms since the Reagan era, to $2trn today. Productivity is soaring. Output per labor hour rose by 47% between 2002 and 2915. American manufacturing activity hit a 13 year high in September. Our biggest problem is manufacturing cannot find enough skilled laborer! It is estimated that in the next ten years, there will be 3.5 million manufacturing jobs will go unfilled as a result. Public-Private partnerships aim to speed up the development of advanced techniques such as 3-D printing and digital manufacturing and to help train workers in these areas.

It will take more than a few of these partnerships to tackle America’s yawning skills gap. Initiatives, policy makers and manufacturers can judge what best works and copy successes. Continued technological progress will keep manufacturing employment from returning to past heights. But if skilled workers could be found, they could guide machines and the sector’s output could really take off.

The Tea Party prepared the way for Trump’s insurgency. A serious effort at the deficit would have involved entitlement reform, moderated defense spending or rises and a shutdown of government when they were not forthcoming. The 40-odd congressmen demanded highly partisan, selective cuts that were proxy for antipathy to public spending, for redistribution, and to immigration. This also implied more defense spending and no cuts to social security. What we truly need is a center-right party committed to prudent fiscal restraint, without rancor.
Candidate Donald Trump made aggressive claims about growing the U.S. economy by his plan would raise GDP more than 4%. Then, he stepped up that claim during the third presidential debate saying: “And I actually think we can go higher than 4 percent. I think you can go to 5 percent or 6 percent.” The United States has not seen consistent economic growth of 5-6 percent since the 1940s, or 4 percent since the 1950s and 1960s. Growth in the 1970s, 1980s and 1990s was only slightly above 3 percent. Since 2000, it has been less than that, at 1.6 percent. For the next decade, the nonpartisan Congressional Budget Office (CBO) has projected U.S. GDP growth of approximately 2 percent per year.

Trump’s proposed fiscal policy of tax cuts and increased government spending are not likely to result in a sustained increase in GDP expansion. We think real growth will be short of the 50-200 percent increase over CBO projections that have been promised. We would like to be wrong on this point, but to date we evaluate Trump’s fiscal proposals as unlikely to overcome major headwinds of high debt, low productivity growth and stagnant workforce growth. The latter two have not generally been negative headwinds, but rather have been strong tailwinds for growth for most of U.S. history — so strong that the pernicious negatives of debt were masked when debt-to-income levels were lower than exist today.

October 2017 Economic Overview

Our economy continues on the longest economic expansion in American history, well prior to the recent presidential election, at a pace of around 2%, about as much that is sustainable longer term. Weather related problems may slow the pace, but the trend is well established and is likely to persist. Home construction is modestly increasing held back by the lack of skilled labor and to a degree, the availability of credit. Infrastructure and military spending have been moderate despite Trump’s political spin. City, state and pension spending is and will likely continue constrained because their budgets are mainly in deficit and because of wide spread anti-tax sentiments. Plant and equipment investment is growing faster than GDP. Business inventory accumulation remains low perhaps because of internet innovations that appear to be reshaping consumer practices.
Since employment growth is bound to diminish as the ranks of the unemployed are depleted (the current unemployment rate of 4.4% is unlikely to fall much further), consumption growth, too, is liable to slow.  Once monthly payroll job increases decline significantly, as is probable by mid-2018 if not sooner, sales gains will erode and talk of recession will revive–possibly easing the political gridlock over tax reduction.

I have spent many years of my life outside the US. Living abroad reinforced the idea that what is noblest of our country is exactly its openness: Its openness to talent, to new ideas, to new ways of doing things, to new blood. We are a welcoming society. We don’t build walls, we build towers to seek new horizons and new friends. What is Ellis Island all about if it is not about Welcome? What about NASA and the Peace Corps? These are not isolationist tendencies.

My America is a place that gives immigrants and “the wretched refuse” of the world — the words on the Statue of Liberty — a chance to make this arena for their dreams and ambitions, despite all the difficulties of adjustment. My America is not the one that builds a wall to keep people out. Many of you have lived it in your own lives. America is hardly overrun with immigrants: Their percentage of population is lower than in any decade between 1860 and 1930. Post-World War II, when the population of immigrants fell to 4.7%, that was when America began to stagnate. The potential growth of any economy has, is the sum of workforce and productivity growth.

With baby boomers retiring, the rest of us and our economy need immigration more than ever. The rule of thumb is that 10,000 boomers will hit retirement age every day for years. Someone has to do their work — and someone has to replace their consumption.

September 2017 Economic Overview


America is a confused place today. What has gone wrong is a decline in trust, as defined as the expectation that other people will act in ways that are fair to you. Since Trump’s electioneering and his election, there is precious little of trust about. After his Charlottesville performance, he shows himself to be politically inept, morally barren and temperamentally unfit for his office. The harm will spill over into the rest of his agenda.

Those who say most American can be trusted has declined from 44% in ’76 to 32% in 2016. My fear is that this distrust will contribute to our decline and eventual autocracy. “Trust has been our secret sauce,” says James Dimon of JPMorganChase…reconciling this distrust with the rosy business outlook is tricky. Distrust is toxic because it makes doing business more expensive. Trust in Big Business has fallen from 74% in 1976 to 61% in June of this year. No question that the financial crisis of 2007-8 blew a giant hole in the reputation of business and finance. Another measure is the revenue of legal firms rose by 103% from 1997 to 2012. My fear is that the country’s vast stock of trust built over a very long period of time is being depleted quickly.
The US economy continued its record streak of jobs growth adding 209,000 jobs for the 82nd month in a row to July. Second quarter GDP growth should increase to 2.9% reflecting stronger than expected retail Number. This is the ninth year of economic expansion.

What is critical to understand in light of the current political debate, is that contrary to conventional wisdom, less-skilled immigration does not just knock less-educated Americans out of their jobs. It most often leads to the creation of new jobs- at better wages- for natives, too. Most notable is that it helps many Americans to move up the income ladder. And by stimulating investment and reallocating work, in increases productivity.

There is no clear connection between less immigration and more jobs for Americans. Rather, the prevailing view among economists is that immigration increases economic growth, improving the lives of the immigrants and the lives of the people who are already here. Economists agree that other factors, notably technological improvements, are primarily responsible for the broader deterioration in the fortunes of the American working class. You might consider, for starters, the enormous demand for low-skilled workers, which could well go unmet as the baby boom generation ages out of the labor force, eroding the labor supply. Eight of the 15 occupations expected to experience the fastest growth between 2014 and 2024 — personal care and home health aides, food preparation workers, janitors and the like — require no schooling at all.

But the argument for low-skilled immigration is not just about filling an employment hole. The millions of immigrants of little skill who swept into the work force in the 25 years to the onset of the Great Recession- the men washing dishes in the back of restaurants, the women emptying trash bins of office buildings- have largely improved the lives of Americans.

The politics of immigration are driven, to this day, by the proposition that immigrant laborers take the jobs and depress the wages of Americans competing with them in the work force. It is a mechanical statement of the law of supply and demand: More workers spilling in over the border will inevitably reduce the price of work.

This proposition underpins President Trump’s threat to get rid of the 11 million unauthorized immigrants living in the country by half and create a point system to ensure that only immigrants with high skills are allowed entrance in the future.

But it is largely wrong. It misses many things: that less-skilled immigrants are also consumers of American-made goods and services; that their cheap labor raises economic output and also reduces prices. It misses the fact that their children tend to have substantially more skills. In fact, the children of immigrants contribute more to state fiscal coffers than do other native-born Americans.

We see supervillains bent on our destruction. But really, the threats we face are weak leaders without many options, cultivating fear and chaos as their best, and perhaps last, hope of survival.


August 2017 Economic Overview

The US economy entered the ninth consecutive year of expansion. GDP for the second quarter increased by 2.6% and there are no signs that this trend might change. Since mid-2009, GDP growth has averaged 2.1%, while earlier years averaged over 3.6%. The difference is that today’s economy is vastly larger than those of the 1980s and 1990s.

This slow but steady growth has produced a long stretch of job creation and the economy is on a sound footing. The stock market appears to be fully valued given this outlook, but corporate profits should continue to grow. Consumers are confident and notwithstanding the circus we are seeing in Washington DC our outlook is rosy. Trump’s claim to overhaul the tax code and to renegotiate trade deals, that he can get the economy moving in excess of 3%. No breakout is imminent. The economy is firmly entrenched at a little better than 2%.

Trump’s fatuous decision to spurn the Paris agreement was opposed by most of his advisers, most big American firms and two-thirds of the American voters. It will not give life to the US coal industry nor will it solve problems with American environmental policy. He has chosen to abuse the health of the planet, to test the patience of America’s allies and insult the intelligence of his supporters and he is actively diminishing the image and reputation of the US world-wide.