Is the U.S. Economy Getting Better?
The U.S. economy is coming off a sugar high from the tax cuts but struggling to keep this higher growth as GDP begins to slow.
Mark Twain supposedly said, “If you don’t read the newspaper, you are uninformed. If you do read the newspaper, you are misinformed.” (I’m not sure what he would say about my magazine articles.)
Anyone reading today’s financial press would think the U.S. economy is accelerating—finally taking off from its post-financial crisis lackluster performance to what Tom Brokaw called “a roaring economy” on Meet the Press this past weekend.
However, the numbers do not bear Tom or the rest of the media out. For example, in 2017, GDP growth was 2.3%, which is not much better than what it has been. In 2010, it rose 2.5%; 2011, 1.6%; 2012, 2.2%; 2013, 1.7%; 2014, 2.6%; 2015, 2.6%; and 2016, 1.5%.[i]
Moreover, corporation and consumer borrowing, the lifeblood of future economic growth, slowed in 2017. Companies increased their borrowing by just 1%, compared to a 6% increase in 2016.[ii] Borrowing by consumers was up 5%, but that, too, was below the 7% growth in 2016.[iii] (And, at 2.4%, the lowest saving rate since 2005, consumers might soon run out of gas.[iv])
Hiring also slowed in 2017. According to William J. Wiatrowski, acting commissioner of the Bureau of Labor Statistics, “Employment growth has averaged 174,000 per month thus far this year, compared with an average monthly gain of 187,000 in 2016.”[v] That is understandable, as we are late in this economic cycle, and our low unemployment means fewer jobs to fill.
Why do the media keep saying the economy is doing better?
Well, maybe it was last year’s stock market performance, or its strong January showing. Yet the stock market flourished all during this recovery, while GDP growth remained lackluster.
Maybe it’s just the media following the lead of President Trump, who, unlike his predecessor, seems more comfortable hyping the markets and the economy. Alternatively, it may be the rising consumer confidence[vi] and the ISM manufacturing and purchasing indexes fueling the media reports.
But those are just surveys, and, until those polls translate into more borrowing, growth is not going to pick up. And with interest rates spiking, and with consumers and corporations already heavily in debt, it is hard to fathom borrowing increases much from 2017’s weak borrowing.
Rising rates could be a sign that the economy is accelerating, but it could also signify insufficient buyers to purchase the $1 trillion of treasury bonds needed to be sold to fund the rising deficit coming, in part from the tax cuts and the Federal Reserve reducing its balance sheet. And higher rates are required to entice owners of stocks to sell them to buy those bonds.
Are the media doing any harm?
Hyping the economy could cause people to make irrational or overly optimistic decisions. One only has to look at what is happening to bitcoin and other cryptocurrencies. Bitcoin went from $2,000 in May of 2017 all the way up to $19,345 on December 16, 2017, now back down to $9,982. So, in six months, Bitcoin went up 867%, then, in just a month, dropped by 48%, and is probably heading back below $2,000.
The chicken, or the egg?
It will be interesting to see if the media hype is what is driving consumer confidence and other survey numbers. Or are the high levels of confidence, combined with the new tax cuts, a leading indicator of an accelerating economy the media and the President have been telling us we are already in?
Keep an eye out for the first-quarter GDP number. It has been very weak throughout this recovery, in part from a hangover as consumers retrench from overspending during the holidays. If it is weak again, the media may have to reevaluate their “surging economy” story.
[i] Amadeo, Kimberly. “U.S. GDP by Year Compared to Recessions and Events.” The Balance, January 30, 2018. https://www.thebalance.com/us-gdp-by-year-3305543
[ii] Federal Reserve Bank of St. Louis. “Commercial and Industrial Loans, All Commercial Banks.” FRED® Economic Data, St. Louis Fed. https://fred.stlouisfed.org/series/BUSLOANS
[iii] Federal Reserve Bank of St. Louis. “Consumer Loans at all Commercial Banks.” FRED® Economic Data, St. Louis Fed. https://fred.stlouisfed.org/series/CONSUMER
[iv] Bartash, Jeffry. “Consumer Spending Hits 6-Year High – As Americans Cut Savings to 12 Year Low.” Market Watch, January 29, 2018. https://www.marketwatch.com/story/consumer-spending-hits-6-year-high-as-americans-cut-savings-to-12-year-low-2018-01-29
[v] Chappell, Bill, November Jobs Report. “Employment Adds 228,000 Jobs; Unemployment Steady.” NPR, December 8, 2017. https://www.npr.org/sections/thetwo-way/2017/12/08/569370879/november-jobs-report-economy-adds-228-000-jobs-unemployment-steady
[vi] Sheetz, Michael. “Consumer Confidence Jumps as Americans Expect 2017 Momentum to Continue.” CNBC, January 30, 2018. https://www.cnbc.com/2018/01/30/us-january-consumer-confidence-index-125-point-4-vs-123-point-1-expectations.html
These are the opinions of Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only, and should not be construed or acted upon as individualized investment advice.
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