Sunny skies… with clouds on the horizon

The sun continues to shine on the American economy.

The U.S. economic expansion, which began 10 years ago at the end of the Great Recession, is now the longest in recorded history. The previous record U.S. economic expansion lasted from 1991 to 2001.

The U.S. unemployment rate is at 3.7%. In April and May it was at 3.6%, the lowest in nearly 50 years. The Dow Jones Industrial Average, Nasdaq and S&P 500 recently hit record highs.

Seeking re-election in 2020, President Donald Trump has been eager to take credit for the performance of the U.S. economy. Trump signed a $1.5 trillion tax cut into law in 2017 and his administration has reduced numerous regulations to help boost the economy.

“We have the greatest economy anywhere in the world,” Trump said in a recent tweet.

U.S. gross domestic product grew 2.9% in 2018, up from 2.2% in 2017 and 1.6% in 2016.

Several economists predicted an economic slowdown this year. First-quarter U.S. GDP growth was 3.1%, but was projected to grow only 1.6% in the second quarter, according to the Federal Reserve Bank of Atlanta’s GDPNow indicator.

U.S. economic growth has continued despite tariffs implemented by Trump on numerous countries as he seeks to gain improved trade agreements. A new deal with Canada and Mexico is still pending approval by Congress. Trump recently agreed to hold off on new tariffs on Chinese goods as negotiations continue, but tariffs he had already placed on China remain.

There are other signs that U.S. economic growth is slowing. Consumer confidence in June dipped to the lowest level in two years. Nearly two-thirds of manufacturers are preparing for a recession, according to a recent survey by Sikich. Milwaukee-area manufacturing activity declined in May, for the first time in 31 months, but improved in June, according to the Marquette-ISM Report on Manufacturing. U.S. auto sales were down 2.4% during the first half of the year. Job growth in the U.S. has slowed from about 223,000 per month in 2018 to 172,000 per month in 2019.

Trump has been a harsh critic of the Federal Reserve, blaming it for holding back U.S. economic growth. In recent tweets he said the Fed “raised rates far too fast.” GDP growth could be at 4 or 5% “if the Fed had gotten it right,” Trump said.

But slowing economic growth may convince the Fed to cut interest rates, according to some economists.

To gain more clarity about the state of the economy and what lies ahead for the second half of 2019, and beyond, BizTimes Milwaukee surveyed three economists: Joseph Daniels, chair of the Economics department at Marquette University; Avik Chakrabarti, associate professor of economics at the University of Wisconsin-Milwaukee; and Michael Knetter, an economist who served as an advisor for presidents George H.W. Bush and Bill Clinton, and is now president and chief executive officer of the University of Wisconsin Foundation.

The following are their responses.

BizTimes: President Trump and his supporters say the U.S. economy is “booming.” Do you agree? How would you describe the state of the U.S. economy?

Daniels: “Headline economic indicators, employment rates, GDP are solid but showing signs of softening. Changes in the way people work (think gig economy) make me a skeptic of comparing unemployment rates today to the past. Currently, we have record post-war fiscal debt and very low nominal interest rates. As so, the government is driving the headline indicators, not the private sector. Private sector growth and wage growth has been uneven across industries and uneven geographically.”

Knetter: “It is probably peaking…at the end of a long expansion. This expansion has been steady, not really ‘booming’ at any given point as I would use the term, but we are now near full potential output.”

Chakrabarti: “By any standard, the American economy is ‘booming,’ with nearly 70% of the industry groups contributing to a steady growth in the nation’s real GDP. President Trump’s hands-off approach to government regulation, as well as the Tax Cuts and Jobs Act, have proven to be instrumental in steering the economy along a path of steady growth.”

BizTimes: By several metrics, the economy is in good shape for now. But are there any clouds on the horizon that concern you? If so, what?

Daniels: “U.S. debt, corporate debt, tariffs and trade wars, and a conflict with Iran are my primary concerns today.”

Knetter: “The main clouds to me are geopolitical tensions in many areas of the globe, trade tensions with China primarily, but also some other traditional allies, and the fact that both fiscal and monetary policy seem overextended for an economy that has been growing for nearly a decade. The clouds could become a thunderstorm given the stark political divisions we see.”  

Chakrabarti: “While the current economic expansion is the longest in U.S. history, a ‘cloud in the horizon’ that can dampen the realization of maximum potential is a deep divide due to persistent political prejudices.”

BizTimes: What impact are the tariffs imposed by President Trump having on the U.S. economy?

Daniels: “Overall the tariffs have, to date, a very small impact on U.S. GDP as the U.S. is less trade dependent than most economies. It has had, however, a significant impact in some industries. Downstream industries that are heavy users of steel and aluminum are examples. Agriculture has been a target of retaliation and so the impact there is important. More tariffs on China will work their way into the retail sector. Eventually, the impact will be felt by lower-income households as tariffs are known to be a very regressive tax.”

Knetter: “They are putting upward pressure on prices across a variety of goods but the impact is muted by some margin compression as suppliers try to hang on to customers, hoping the impact is temporary.”

Chakrabarti: “The tariffs have been well-timed and the subsequent trade war, instigated by the Chinese government, has already been won fair and square by President Trump. China’s temptation to protect the interest of its middle class through currency sterilization has and will continue to offset any self-fulfilling expectations that could, otherwise, have led to an unintended inflationary pressure in the U.S. economy. Much of the recent rise in prices are transient and can be attributed to the inability of U.S. importers to hedge against risks, allowing room for the Chinese exporters to pass on the burden of tariffs. Any remnant (i.e., post-‘sterilization’) rise in prices would be due to short-run ‘misperceptions’ that will inevitably wither in the long-run.”

BizTimes: What do you expect from GDP for the rest of the year? Will U.S. economic growth increase or slow during the rest of the year and into 2020?

Daniels: “My sense is that growth will slow to 2% heading into 2020. I believe any sustained positive growth rate in 2020 will be problematic.”

Knetter: “I expect a continued slowdown throughout the year because I do not see the labor force growing much for the reminder of the year and I do not think productivity can surge enough to offset that.”

Chakrabarti: “Applications of cutting-edge techniques analyzing credible forecasts based on big data signal at least 2 to 3% growth of the U.S. GDP in any foreseeable future.”

BizTimes: The pace of job growth in the U.S. has slowed compared to 2018. Unemployment has dipped to 3.7%. Is the unemployment rate so low that employers can’t find workers, resulting in slower job growth?

Knetter: “Employment is constrained by the size of the workforce…since we are near full employment, employment growth will require labor force growth, which is going to be very slow. Full employment is good, but it means we will grow more slowly.”  

Chakrabarti: “Consistent with the most recent estimates published by the Bureau of Labor Statistics, the U.S. unemployment rate has dropped to its lowest since December 1969. Job growth has been phenomenal, with employment gains exceeding 100,000 jobs in almost every month following the 2016 election. As the most recent Employment Situation Report reflects, nonfarm payroll employment has exceeded market expectations by a significant margin: the American economy has added nearly 6 million jobs since President Trump was elected.”

BizTimes: Where is the U.S. economy going to find the workers it needs to keep growing?

Knetter: “It will need to find more productivity to keep growing and that is possible with technology and workers finding the best match.”  

Chakrabarti: “There is no dearth of immigrants waiting in line to populate the U.S. labor market: it is high time to remove any false perception of excess demand and, instead, enforce strict screening at the point of entry. Moreover, rapid growth of the U.S. economy can be complemented by recent advances in emerging technologies, automating physical as well as intellectual tasks.”

BizTimes: What impact is the tight labor market having on wages for U.S. workers?

Knetter: “Wage growth has been slower than I would have expected in a market this tight.”  

Chakrabarti: “Real wages are rising. The most recent Employment Situation Report records that the average hourly earnings have been rising by at least 3.2% over a 12-month period. According to the most recent Consumer Price Indices, inflation has been contained well within the range of 1.5% to 1.9%.”

BizTimes: The stock market grew steadily in 2016 and 2017, but has been volatile the last year-and-a-half. Why is that, and what do you expect for the rest of the year from the stock market?

Daniels: “Uncertainty is the root cause of market volatility. Tariffs, trade war talk, conflict with Iran, the uncertainty of (the United States-Mexico-Canada Agreement) passing in Canada and the U.S., and corporate debt overhang have clouded the picture of U.S. economic growth.”

Knetter: “At a fundamental level, people are worried that the expansion is slowing down and that earnings may slow down with that. I expect that the combination of Fed policy and trade regime will be the main drivers of markets for the balance of the year. The president needs the expansion to continue into 2020 to make a strong case for re-election and I expect he will use whatever influence he has on these levers to keep things moving ahead.”  

Chakrabarti: “The Dow Jones Industrial Average is expected to sustain its impressive height, while any volatility in the stock market will keep coupon clippers busy.”

BizTimes: Agriculture remains a very important industry in Wisconsin. Dairy farms in the state are going out of business at a rapid pace. Why is this? What can be done to help Wisconsin’s agriculture industry?

Daniels: “Over-capacity relative to declining demand is the major driver of current agricultural woes. In the dairy industry, economies of scale have led dairy farms to grow larger and larger. This capacity level and decreasing demand for many dairy products combined to push prices down such that farmers are operating at a loss. I am also concerned that the very low level of planting that we see in the Midwest (due to heavy rains) will drive crop prices up and hence drive up costs to dairy farms, as well. Reduced foreign demand (due to the trade war), may mitigate this impact.”

Chakrabarti: “The U.S. Department of Agriculture has confirmed that up to $14.5 billion, of the $16 billion fund President Trump approved for financial aid to farmers, will be available in three rounds of direct payments through the Market Facilitation Program. While Wisconsin’s agriculture had a rough year in 2018, farming remains a profitable investment in Wisconsin, as is reflected in the land value. Agriculture yields nearly $90 billion annually for the Wisconsin economy and provides more than 10% of the state’s total employment.”

BizTimes: What do you expect the Fed to do with interest rates the rest of this year?

Daniels: “I would expect that later this summer, the Fed will cut the target rate by 25 basis points. By year end, it could be a 50 basis points reduction.”

Knetter: “Cut by 50 basis points.”

Chakrabarti: “A ‘make-no-move’ policy posture is likely to prevail in view of the recent decision of the Federal Open Market Committee to leave interest rates unchanged for the third time this year.”

BizTimes: The U.S. economy has been in expansion mode since 2009. How much longer will it continue? Is a recession near?

Daniels: “Of course a recession is near. It just depends on how you get someone to define ‘near!’ What I am more comfortably predicting is a period of increased volatility that flattens growth prospects. Oil prices are certain to add to this in the U.S. Look for recessions in the economies of important trade partners to reverberate back to the U.S.”

Knetter: “A slowdown is upon us. It will need to be managed well with fiscal, trade and monetary policy to avoid a recession. With an election looming, I am still betting a recession is at least a year off.”

Chakrabarti: “As of today, only a pessimist would predict ‘nine of five’ recessions with the hope of being picked as a prescient while the American economy shows no sign of any risk of a recession.”

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Andrew is the editor of BizTimes Milwaukee. He joined BizTimes in 2003, serving as managing editor and real estate reporter for 11 years. A University of Wisconsin-Madison graduate, he is a lifelong resident of the state. He lives in Muskego with his wife, Seng, their son, Zach, and their dog, Hokey. He is an avid sports fan and is a member of the Muskego Athletic Association board of directors.

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