“We haven’t seen numbers like this in a long time” – small business confidence soars

Small business optimism is at its highest level since 2004, according to a National Federation of Small business survey. Small businesses expect to see increased sales, hire more employees, and expand capital investment.

“We haven’t seen numbers like this in a long time,” said NFIB President and CEO Juanita Duggan. “Small business is ready for a breakout, and that can only mean very good things for the U.S. economy.”

Source: Small Business Economic TrendsNFIB | NFIB

Kenneth Rogoff: Four percent growth is not impossible

Kenneth Rogoff was the chief economist of the International Monetary Fund from 2001 to 2003.

[I]f the US economy really does have massive quantities of underutilized and unemployed resources, the effect of Trump’s policies on growth could be considerable. In Keynesian jargon, there is still a large multiplier on fiscal policy. It is easy to forget the biggest missing piece of the global recovery is business investment, and if it starts kicking in finally, both output and productivity could begin to rise very sharply.

Source: The Trump Boom? by Kenneth Rogoff – Project Syndicate

Signs are pointing to strong growth for the U.S. economy and that’s a big deal

Global growth will pick up faster than previously expected in the coming months as the Trump administration’s planned tax cuts and public spending fire up the U.S. economy, the OECD recently announced, revising its forecast upward from earlier this year.

In its most recent Economic Outlook, the Organization for Economic Cooperation and Development projected the U.S. economy would grow by 2.3 percent in 2017 and to 3 percent in 2018. Global growth is expected to accelerate from 2.9 percent this year to 3.3 percent in 2017 and reach 3.6 percent in 2018.

Markets have shown some early confidence that the economy will improve with the new administration. The Dow Jones Industrial Average is up almost 5 percent since election day and the S&P 500 is up more than 3 percent. Consumers seem to be sharing the confidence with early reports of strong retail sales for Black Friday and Cyber Monday.

During his campaign, Mr. Trump pledged to boost infrastructure spending by as much as $1 trillion, although the details of how that would be financed are sketchy. He has also promised to cut corporate and personal income taxes. In addition, changes to employment regulations and the Affordable Care Act are expected to spur hiring by businesses and bring more Americans into full time employment.

Costly and onerous overtime rules imposed by the Obama administration have been blocked by a federal judge and are likely to be overturned during the Trump administration. Changes to the ACA are expected to jettison mandates triggered by having more than 50 employees or by working more than 29 hours a week. Be prepared for more people working more hours.

Financial reforms are on the way with an expected overhaul of Dodd-Frank. House Finance Committee Chairman Jeb Hensarling and others in Congress have laid out the key principles they say will guide financial reforms: restoring rule of law to the regulatory process and allowing banks to regain control of their own lending and other business decisions so long as they are credibly taking risks with their own funds rather than relying on the protection of taxpayers. This may be the end of “Too Big to Fail.”

Rising interest rates will strengthen bank profits and provide a tailwind to encourage more lending while also slowing the growth in housing prices.

Does growth really matter? Yes, it’s a big deal

When economists talk about growth, they are trying to get a handle of how much better (or worse) off are we versus a year ago. Are we getting richer or poorer or just standing still? When we talk about growth, we talk about year-over-year percentage growth rates. But, what is a “good” growth rate?

Here’s some perspective, looking back in time.

Average incomes doubled from the bottom of the Great Depression in 1933 to the middle of the post-war boom of 1950—a space of just 17 years. Over that period, incomes grew an average of 4 percent a year. Incomes doubled in less than one generation.

It took another 27 years afterward (1950 to 1977) for incomes to double. The people watching the TV show Happy Days were twice as rich as the people portrayed in the show. That amounts to an average annual growth rate of 2.5 percent a year.

Then, after that, it took another 38 years (1977 to 2015) for incomes to double. Over that period of time, average incomes grew by 1.8 percent a year. It took almost two generations for incomes to double.

A difference of 1.5 percentage points in the growth is the difference between doubling incomes every generation or doubling every other generation.

Think of it this way. Since 2010, GDP growth has been about 2.2 percent a year. At that rate, it would take more than 30 years for incomes to double. If that growth can be boosted to 3 percent a year, incomes would double eight years faster. That’s a big deal. That’s one reason stock prices rise on even modest upward revisions to GDP forecasts.

Look on the flip side, regulations and taxes that stifle growth—even if by less than one percent—can have serious long run effects on our standard of living. When a politician says, “Well it’s just half a percentage point off the growth rate,” you should answer, “Well that’s another five to ten years we lose in income growth.” That’s a big deal.

So, let’s get out there and grow this economy. Your kids and grandkids will thank you for it.

Britain’s exit from the EU will rattle the U.S. economy

U.K. voters elected to exit from the European Union. This is a major shake up for the U.K. and the rest of Europe and is almost certain to rustle, rattle, and otherwise jolt the U.S. economy.

The first impacts will be seen in foreign exchange markets as skittish investors pull out of U.K. and European markets to put their money in the safety of U.S. assets. Several economists predict the impacts of Brexit on the U.S. will be confined to our financial markets. Nevertheless, the result will be a rising dollar relative to the pound and the euro.

Many economists expect some ripples of Brexit hitting the U.S. economy. In which case, the next round of impacts will be seen in trade as a surging dollar suppresses demand for U.S. exports. In addition, economists are forecasting a slowdown in the EU economy, further depressing demand for U.S. exports. As a result, several researchers have cut their forecast of U.S. economic growth to less than 2 percent over the next year.

On the upside, a stronger dollar will reduce the cost of imports lowering U.S. production costs, boosting consumer buying power, and limiting inflation.

The U.K.’s exit from the EU may stifle cross-border merger activity as London is no longer seen as a gateway to European markets.

Brexit’s biggest unanswered question: What will happen to free trade?

While much of the U.K. vote to exit the EU was driven by concerns over immigration and hatred of the EU’s bloated bureaucracy, the Brexit campaign was suffused with protectionist undertones. Both Hillary Clinton and Donald Trump have clearly stated their opposition to free trade deals. If Brexit boosts protectionism worldwide, expect to see much slower growth—or recession—in the next few years.

The bottom line …

Pros: A strong dollar will reduce the cost of imports and keep inflation in check. U.S. importers and consumers will benefit from lower prices. It’s a good time to take that European vacation.

Cons: A strong dollar and EU economic slowdown will reduce demand for U.S. exports. Increasing protectionism will reduce opportunities of international trade. U.S. exporters will be harmed. Potential slowdown in already slow employment growth.

On Demand newsletter for October 2015


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Three takeaways from the Fed’s forecast

The print version of the Wall Street Journal provides a graphic showing that Fed policy makers have reduced key economic forecasts during their latest meeting in which the decided not to raise interest rates.

Three takeaways from the graphic:

  1. Growth is expected to slow over the next few years. After taking out inflation, the economy is expected to grow at roughly 2 percent a year.
  2. Inflation is expected to increase to 2 percent a year. Adding inflation to the real rate of GDP increases, yields an economic growth of 4 percent a year, but half of the growth is from rising prices rather than increasing output.
  3. The Fed expects growth to be lower than it projected in June, but is projecting higher employment. Expect to see reports of declining labor productivity, which may tap down wage pressure.

Economic forecasting: Comfort blanket or wet blanket?

God made economists to make weather forecasters look good.

Hear enough economic forecast speeches, and you’re bound to hear this old joke. And, yes, I’m guilty of using the joke more than once.

Two recent articles put the joke in to perspective.

First the Wall Street Journal editorial board complained that the Fed has history of overly optimistic economic growth forecasts. They note that “Economic forecasting isn’t easy, but it’s striking how consistently the Fed has been wrong in a single direction.”

Remarking on the Fed’s spotty track record at forecasting first quarter growth, the WSJ snarks, “Economists always blame the cold weather, but it is not news that winters are cold.”

slow-growth-fed

 

In another article, Ireland’s Independent newspaper, pokes at the economics profession:

At one level, it is clearly absurd for the Department of Finance to begin to predict what will happen to the economy over the next five years. After all, the department missed the last financial crisis—along with almost every other conventional forecasting organisation.

However, the paper provides some much needed context, quoting economist Tim Harford (a/k/a The Undercover Economist):

“Economists have allowed themselves to walk into a trap where we say we can forecast, but no serious economist thinks we can,” he writes. “You don’t expect dentists to be able to forecast how many teeth you’ll have when you’re 80. You expect them to give good advice and fix problems.”

Society has always craved certainty—when there is no such thing. We know forecasts can be wrong, but the question we need to ask is whether the forecasts on which we rely so much are just a comfort blanket or whether they are a dangerous delusion.

Many economists have an incentive to provide a “comfort blanket,” while others have an incentive to be wet blanket.

It’s up to an educated public to tell the difference and weigh the evidence.