Reasons for hope: The Economy is Finally Poised for Serious Growth
The election of Donald Trump sparked a deluge of drama that began long before he was inaugurated and continues through today. Media reports have been filled with debates over Trump’s candidates for cabinet posts, allegations that Russia hacked the election, questions about the Trump family’s business dealings and the new president’s phone calls with foreign leaders. News about the economy has been relegated to brief items that receive little promotion. However, when all of the economic news is combined, a picture can be painted — and that picture reveals that the U.S. economy may be poised for serious growth.
Indications Pointing to Serious Growth for the Economy
According to Reuters, factory activity reaches a two-year high during January 2017, suggesting that the manufacturing industry is making a comeback. Employers in the private industry also increased their hiring, and although construction spending decreased by 0.2 percent in December, November showed an increase of 0.9 percent.
An article in The New York Times revealed additional encouraging information. January retail sales showed an increase of 0.4 percent, according to the Commerce Department, and after excluding auto sales, the increase was 0.8 percent. New housing permits in January rose by 4.6 percent, an 8.2-percent increase over January 2015. The Consumer Price Index increased by 0.6 percent overall and 0.3 percent after excluding energy and food.
The New York Times article also stated that there were 227,000 jobs added during January. National unemployment rates are already down, and the number of new claims for unemployment has been setting weekly lows that have not been matched since the “boom times” of the 1970s.
For the entire year, the U.S. economy grew by 1.6 percent, according to CNN Money, but the annualized rate for the fourth quarter was 1.9 percent. Although this is still a slow rate of growth, it is a good indication that the turnaround is already underway, and it is approaching the ideal growth of between 2 percent and 3 percent. CNN also noted that consumer optimism in December was higher than it has been for 15 years.
If the data reported for the state of New York by the Federal Reserve Bank of New York reflect national trends, the economy is indeed recovering. According to the bank’s survey, the index of business activities rose to a two-year high, with the new orders index reaching 13.5 and the shipments index increasing to 18.2. For the first time in over five years, the unfilled orders index increased above zero. Inventories, delivery times, hours worked and total employment all increased as well. The survey also revealed that most companies are planning to increase their capital spending for 2017, while less than 25 percent plan to reduce capital expenditures.
Economic Forecasts for 2017 Are Mixed
The Federal Open Market Committee, or FOMC, is a branch of the Federal Reserve System that controls the discount rate, open market operations and the reserve requirement. The FOMC meets eight times per year and issues forecasts after four of those meetings. After its meeting in December 2016, the FOMC forecast an increase of 2.1 percent of the gross domestic product in 2017, dropping to 2.0 percent the following year.
The FOMC predicts an unemployment rate of 4.5 percent for 2017 and 2018, but since much of the job growth is in food service and retail jobs that offer low wages, it might be prudent to take unemployment rates with a grain of salt. Even Janet Yellen, who chairs the Federal Reserve, admits that there are many part-time workers who would rather work full time, making the unemployment rate artificially low. She believes that the real unemployment rate, which is usually twice the official rate, is a more realistic representation.
The FOMC raised the interest rate to 0.75 percent in December 2016. Three rate hikes are planned for 2017, but the timing of them has not been decided. However, the plan calls for interest rates of 1.5 percent by the end of 2017, increasing to 2.0 percent in 2018 and climbing an additional 1.0 percent the following year. Higher interest rates could depress economic growth through higher credit card and mortgage rates.
In an article posted on Politico.com, author Ben White likens the reaction to Trump’s economic plans as a “sugar high” that will be followed by a “sugar crash.” White argues that Trump’s agenda will trigger an “inflationary disaster,” spike interest rates and dramatically increase the deficit. He also warns that if Trump proceeds too quickly with his plans to build a wall along the border with Mexico, impose his proposed tariffs and shred trade agreements, the nation could be plunged into a severe recession.
Research economists at Goldman Sachs recently posted videos discussing economies in the United States, Europe and China as well as the outlooks for Asia and the world. For the U.S., the outlook calls for economic growth of 2.25 percent in 2017; the growth is expected to be due primarily to tax reforms and spending on infrastructure.
Europe is expected to see an economic growth of 1.5 percent, driven primarily by fiscal stimulus; these modest gains, however, are not seen as enough to overcome the structural and institutional weaknesses that have resulted in low growth in past years. Although China is expected to post an increase in the gross domestic product of 6.5 percent, analysts feel that the plans to ease consumer credit, invest in infrastructure and possibly devalue its currency carry risks that could affect the country’s long-term economic stability. Global growth is projected to be between 3 percent and 3.5 percent, driven primarily by growth in the United States.
Is a Derailed Economy Still Possible?
Despite the positive signs, some economists warn that there are still troubling signs that could derail economic recovery. Subprime car loans account for approximately 20 percent of the $1 trillion in car loans open at the end of September 2016. Outstanding student loans account for $1.4 trillion. Although government-insured housing loans to subprime borrowers decreased dramatically after 2008, they are still out there, and the default rates are staggering. If interest rates go up, the default rates could also increase.
The price of oil is another area of concern. Oil prices collapsed in 2015, primarily due to the shale oil production in the United States. Since oil contracts use U.S. dollars, a strong dollar has continued to keep oil prices down. A relatively mild winter in most of the country reduced consumption, halting price hikes. However, economists do not expect crude oil to hover around $50 per barrel for long, and a serious increase in oil prices could impact economic growth.
Trump Has Much Work to Do
Although the economy is showing signs of a comeback, recovery is not guaranteed. President Trump still has a great deal of work to do if he is going to accomplish everything he promised during his campaign. However, not everything that he would like to do is within his sole authority; he will require support from both sides of the aisle to accomplish some of his goals. Precisely what Congress and Trump will do remains to be seen.
Economic issues are seldom simple. If you would like to explore more on the topic, you can find many helpful articles at the Personal Money Store.