Poor Economic Growth Ahead?

Popular Economics Weekly

First-Quarter GDP Growth Estimate Decreased “On April 7, the GDPNow model estimate for real GDP growth in the first quarter of 2026 is 1.3 percent, down from 1.6 percent on April 2.”

AtlantaFed

More warnings of slowing economic growth are appearing. And now we have a Gulf War that makes predictions more unpredictable. Who knows what’s to come?

The Atlanta Federal Reserve’s GDPNow estimate of first quarter (Q1) 2026 economic growth that is widely followed by economists has plunged from its high of 3 percent, where it had been sitting since January 2026, to 1.3 percent in the latest revision.

Why the surprise drop, since fourth quarter 2025 GDP growth had already plunged from 1.4 percent to 0.7 percent in its latest revision?

Much higher GDP growth in Q2 and Q3 last year showed that financial markets were buying the Trump message that American taxpayers and businesses would start spending more from the Big Beautiful Tax Bill write-offs this spring.

The latest retail sales and a good March unemployment report (+178,000 jobs) had kept up optimism for a better year. There were also hopes that increased business investments—another component of GDP—would create more jobs.

But in fact the opposite is happening. Most business investment is being spent on AI energy centers, which is causing more joblessness, with wholesale job layoffs being announced as a consequence—at the likes of Amazon, which has announced a total of 30,000 job cuts to date.

And we are seeing imports continuing to flood in, far out distancing exports, which increases the trade deficit and brings down our Gross Domestic Product growth, since GDP measures only what is produced or sold in the U.S.

The Wall Street Journal survey says that on average, economists forecast gross domestic product adjusted for inflation to grow 2.1% in the fourth quarter this year from a year earlier. That was down incrementally from 2.2% in January. They expect the unemployment rate will be 4.5% in December, matching their forecast in January, before the war. Last month the unemployment rate was 4.4%.

Economic Growth is difficult to forecast; economists will tell you. And the Atlanta Federal Reserve is one of the few that dare to do it. We don’t even have the final fourth Quarter 2025 revision yet, which has shrunk steadily as I said after a much better looking Q3 of +4.4 percent GDP growth.

Besides job, trade deficit, and business investment data, the GDP includes consumer spending. That number hasn’t faltered as badly. So we should be looking at consumer behavior if we want to know what happens next.

I said last week that retail sales picked up in March, so consumers are shopping again and consumer confidence edged up as well.

There is something else that could improve consumers’ attitudes and hence GDP. Lower inflation would increase the demand for goods and services—but how to achieve it with $4 per gallon gas prices for who knows how long? Lower inflation is possible with AI efficiencies increasing labor productivity and lowering product costs. But it takes time, years, as with past technological innovations.

The just-announced two-week ceasefire could certainly bring down oil and gas prices, if it holds, and Trump will want it to hold given its unpopularity.

The Federal Reserve is hinting it could go up or down on their interest rate decisions this year. But if the labor market continues to shrink the Fed will also want lower interest rates ahead. And any easing of credit conditions (lower cost of borrowing) would be good news for economic growth this year.

Harlan Green © 2026

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Why Do Trump's Republicans Hate Immigrants?

 Popular Economics Weekly

“The stakes are enormous if Republicans succeed in removing most of the estimated 11 million undocumented worker (only half of which are from Mexico and the Latin countries), and cut legal immigration in half, as they have promised to do. Economic growth will plummet, since it is mainly based on growth of the working age population, as well as labor productivity, which has also fallen since 2000.” Harlan Green Huffington Post

Huffington Post

I wrote in 2017 that for most of the past half-century, adults in the U.S. Baby Boom generation – those born after World War II and before 1965 – have been the main driver of the nation’s expanding workforce. But as this large generation headed into retirement, the increase in the potential labor force would slow markedly, and immigrants will play the primary role in the future growth of the working-age population (though they will remain a minority of it).

Republicans know this. Then why have Republicans and the Trump administration opposed immigration reform when there has never been enough American-born citizens to fill the labor rolls?  America has always had a labor shortage, which is why we have always been a land of immigrants.

A hint to the answer may be in the Gestapo-like tactics of the ICE raids to deport undocumented immigrants that is supposedly because they are supplanting lower-paid jobs that could be held by American citizens. (But that has never been the case, according to various studies that show American citizens won’t take such lower-paying jobs.)

The Republican Party has come to believe that it can only maintain power by preventing minorities from voting. They have suppressed voters in red states by limiting access to polls in minority districts and getting the Supreme Court to nullify parts of the Voting Rights Act that allowed federal government oversight of voting districts to ensure they weren’t over-gerrymandered to not accurately represent the population mix.

And now it is taking a darker turn with Trump’s callup of National Guard Troops to occupy Democratic cities, and threats to call any protests signs of an insurrection. Why have Republicans become so desperate that they now want to rule by decree?

One reason is the total growth of adults in the prime working ages of 25 to 64 over the next decade will be lower than the total in any single decade since the Baby Boomers began pouring into the workforce in the 1960s. The growth rate of working-age adults will also be markedly reduced, according to a PEW Research study.

The latest immigration trends studied by Josh Bivens of the Economic Policy Institute’s (EPI), a labor think tank, echoes the PEW analysis. Future economic growth will suffer if there aren’t enough new immigrants to supplant retiring workers in our adult labor workforce.

“The fast growth of the labor force between 1948 and 2007 and the slowdown since then can be explained by three big demographic changes: the Baby Boom that saw high fertility rates from the late 1940s to the mid-1960s and then a sharply lower fertility rate since, the steady influx of women into the labor force from 1948 until roughly 2000, and population aging that has seen the share of the over-65 population rise rapidly since 2007,” said Bivens.

We know that President Trump has always been racist; calling any immigrants that aren’t from white, Caucasian countries, such as Norway, criminals and the lowest of the low, hence his appeal to White Christian Nationalists.

Withholding funds from states and institutions in the name of suppressing DEI hiring is the Trump administration’s attempt to impoverish Americans in the blue states, as they have done in the red states. Their answer to the smaller workforce is the hope that AI and robots will fill the labor market void.

It is the reason for the huge rally in AI companies that is driving today’s stock market highs, driven by the hope that AI can replace our declining population.

The EPI’s Bivens says the labor force of the U.S.-born population will likely fall each year for the next decade. So what can we do to alleviate the hardships to come because Republicans have no answer for the half of our working population that will be replaced by AI, and already live month-to-month with no excess savings?

The EPI says it can be done with a social safety net that serves all Americans, not just the wealthy. “In addition to policies that prioritize tight labor markets, policies should target the following for adults:

• reductions in opioid use
• reductions in incarceration rates
• improvements in policies that support parents and caregivers
•  substantial improvements in the pay and working conditions of jobs of the future (like caregiving jobs) to attract and retain workers

“Investments in today’s children are crucial for boosting the labor force participation of future generations, such as safety net policies that promote long-term health and educational investments. 

This isn’t a pie-in-the-sky wish list but what can be done today, as it has been done in the past when such autocracies fail, as they always do.

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

What is Q3 Growth To Be?

 Popular Economics Weekly

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2025 is 2.5 percent on August 5, up from 2.1 percent on August 1. GDPNow

AtlantaFedGDPNow

Predictions for third quarter GDP economic growth are again all over the map, per the Atlanta Fed graph, as were those for Q2, with no finalized tariff agreements. Both consumers and businesses are now attempting to time their purchases because of uncertain import prices.

That’s why the nation’s trade deficit in goods sank 11% in June to a 22-month low as U.S. companies timed when to buy imported goods with on-again, off-again Trump tariffs. a pattern that’s likely to play out over at least a few more months, if not the rest of the year.

It’s also why Q2 GDP grew at 3.0 percent in the initial estimate. Imports shrank (that are deducted from exports to calculate the foreign trade balance of payments and GDP) while Americans waited for TACO Trump to give trading partners another 90-day reprieve from his threatened retaliations.

The two-month GDP average was a 1.3% growth rate. The question will be how the tariff uncertainties play into growth for the rest of the year. And will the inflation already caused by the tariffs ever come down enough to warrant further Fed rate cuts?

The question on everyone’s mind is why President Trump is so erratic in his attempt to control world trade? He claims it is a negotiating tactic to rebalance the large trade imbalances with countries like China, but the import taxes are really meant to cover the $trillions being added to the federal debt from his big, beautiful tax bill.

The uncertainty over future import prices makes third quarter growth difficult to pin down, in other words. There was some good news as nonfarm business sector labor productivity increased 2.4 percent in the second quarter of 2025, the U.S. Bureau of Labor Statistics reported today, as output increased 3.7 percent and hours worked increased 1.3 percent.

Labor productivity had surged as high as 4 percent during the Biden administration’s New, New Deal surge in investments. But any massive loss of immigrant workers that make up 19 percent of the civilian labor force will harm labor productivity as well.

Higher labor productivity is a key ingredient for decent economic growth. We can only hope that there are enough workers to keep the U.S. economy growing as the new tariffs are finalized and begin to affect growth.

This is why the advance number for seasonally adjusted insured unemployment insurance during the week ending July 26 wasn’t good news.

It's why the 1,974,000 continuing jobless claims, an increase of 38,000 from the previous week's revised level, was so important as an indicator of the labor market. This is the highest level for insured unemployment since November 6, 2021 when it was 2,041,000 during the COVID-19 pandemic.

This is another alarming sign that will further slow growth at the same time more immigrants are leaving the labor force and not being replaced with the normal immigration flow. The hope is that AI can be the savior that will keep GDP growth from plunging if it boosts the labor productivity numbers.

But robots and software programs won’t replace those lower paying jobs in construction, manufacturing and the service sector of leisure and hospitality that immigrants have always occupied.

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Immigrants the Lifeblood U.S. Economy

 The Mortgage Corner

“For most of the past half-century, adults in the U.S. Baby Boom generation – those born after World War II and before 1965 – have been the main driver of the nation’s expanding workforce. But as this large generation heads into retirement, the increase in the potential labor force will slow markedly, and immigrants will play the primary role in the future growth of the working-age population (though they will remain a minority of it).” PEW RESEARCH

PEW

I wrote in 2017 that the stakes are enormous if Republicans succeed in removing most of the estimated 11 million undocumented worker (only half of which are from Mexico and the Latin countries), and cut legal immigration in half, as they have promised to do, economic growth will plummet, since it is mainly based on growth of the working age population, as well as labor productivity, which has also fallen since 2000.

America has always had a labor shortage. It’s the reason we have needed immigrants and led in technology to keep our production levels high. And as the 2017 PEW study above highlights, immigrants have been at the core of our national workforce.

This is while the Trump administration continues to trip over itself in every economic sector, repeating the same mistakes it made during Trump’s first term. This is not only with its tariff policy—negotiating with China to lower their tariffs, though China says they are not currently in talks—but is especially true with its immigration policy that is designed to please its MAGA base.

It's pleasing no one else. Former Labor Secretary Robert Reich reports on Substack that one American was detained by ICE in Arizona for 10 days until his relatives produced papers proving his citizenship, because ICE didn’t believe he was American. Meanwhile, ICE handcuffed and deported a group of German teenagers vacationing in Hawaii because they turned up without a hotel pre-booked, which ICE found “suspicious.”

The number of adults in the prime working ages of 25 to 64 – 173.2 million in 2015 – will rise to 183.2 million in 2035, according to Pew Research Center projections. That total growth of 10 million over two decades will be lower than the total in any single decade since the Baby Boomers began pouring into the workforce in the 1960s. The growth rate of working-age adults will also be markedly reduced, says the study.

The Biden administration’s record growth was based in large part because of the immigration surge that Trump is attempting to reverse, but that Trump characterized as criminals to stir up his MAGA base. There was no crime wave; records show immigrants commit fewer crimes than American citizens.

So Trump is creating a worker shortage when he wants to bring back manufacturing. Who will replace the immigrants? We need to develop more labor-saving technologies, which means developing better computer chips that Biden has already funded for more Research and Development grants and the CHIPs Act, but will take time to develop.

Trump has no plan of his own, other than slash the government programs that would create newer technologies, nor is anything being done at the congressional level, except pushing for more tax cuts. This was his only accomplishment during the first Trump administration.

It’s a sad day when Trump, Republicans and his MAGA supporters see immigrants as threats when they are the only readily available resource that will grow our economy.

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

US Growth Picks Up Speed

 Popular Economics Weekly

Any signs of a recession are declining. The U.S. economy is picking up speed in the BEA’s third and final revision of second quarter GDP growth. The U.S. economy has held the 3.0 percent growth rate, mostly due to strong consumer spending, our main growth engine, which was revised down to 2.8% from 2.9%.

Government spending was also an important ingredient, revised up to 3.1% from 2.7% in the second revision, as more Bidenomics investments kicked in. And, the personal consumption expenditures (PCE) price index in the GDP report was 2.5 percent, the same as the previous estimate. Excluding food and energy prices, the PCE price index increased 2.8 percent, also the same as the previous estimate.

BEA.gov

The BEA also reported that profits from current production (corporate profits with inventory valuation and capital consumption adjustments) almost doubled in the final revision. So strong economic growth continues without any inflation increase.

The real take from these results is that government investment is driving much of the higher growth where it counts, in future growth, whereas most corporate profits finance corporate stock buybacks that benefit corporate executives, stock and bondholders but not the public sector of roads, bridges, the environment, and healthcare supported by public investment.

The White House said last June just how well Bidenomics policies have been working. “Our economy has added more than 13 million jobs—including nearly 800,000 manufacturing jobs—and we’ve unleashed a manufacturing and clean energy boom. There were more than 10 million applications for new small businesses filed in 2021 and 2022—the strongest two years on record.”

It has given a significant boost to labor productivity, which began to rise in 2023 and boosts wage earners’ standard of living.

Nonfarm business sector labor productivity increased 2.5 percent in the second quarter of 2024, the U.S. Bureau of Labor Statistics reported today, as output increased 3.5 percent and hours worked increased 1.0 percent. (All quarterly percent changes in this release are seasonally adjusted annualized rates.) From the same quarter a year ago, nonfarm business sector labor productivity increased 2.7 percent.

This in turn has stimulated more capex spending—private sector investments that expand production facilities—which is growing at 6% in Q2 2024, seasonally adjusted.

The Economic Strategy Group highlighted the importance of the recent surge in labor productivity: “US labor productivity has enjoyed a period of renewed growth over the past year, interrupting a nearly twenty-year decline: the 2.7 percent productivity growth in 2023 outpaces the 1.5 percent annual average since 2004, and it nearly matches the 2.9 percent pace seen during the country’s last productivity surge in the 1990s.”

The Economic Strategy Group report said a major factor in the productivity surge was the post-pandemic surge in business creation that was also highlighted in the 10 million small business increase touted by the White House report.

There is no question it has taken both public and private sector spending to continue our post-pandemic recovery and reduce worries of an impending recession.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Immigrants Drive Republicans Crazy!

 Answering Kennedy’s Call

The stakes are enormous if Republicans succeed in removing most of the estimated 11 million undocumented workers (only half of which are from Mexico and the Latin countries), and cut legal immigration in half, as they have promised to do.

Republicans haven’t let up on their campaign to limit immigration since 2017 when I first wrote about the newly elected Trump administration’s demonization of immigrants.

It’s now become even worse as Presidential candidate Trump and VP candidate JD Vance on the campaign trail have even doubled down on demonizing immigrants, saying they are now eating the pets of Ohioans!

Huffingon Post

The absurdity of Republicans’ allowing Trump’s MAGA movement to take over the Republican Party has made it worse for economic growth as well. Any mass deportation of immigrants would cause great harm to the American economy.

For most of the past half-century, adults in the U.S. Baby Boom generation – those born after World War II and before 1965 – have been the main driver of the nation’s expanding workforce, reports the PEW Research Center. But as this large generation heads into retirement, the increase in the potential labor force will slow markedly, and immigrants will play the primary role in the future growth of the working-age population (though they will remain a minority of it).

The stakes are enormous if Republicans succeed in removing most of the estimated 11 million undocumented worker (only half of which are from Mexico and the Latin countries), and cut legal immigration in half, as they have promised to do.

Economic growth will plummet, since it is mainly based on growth of the working age population, as well as labor productivity, which has also fallen since 2000.

The drop in labor productivity is in part because of the drop in capex spending, the investment in new plants and equipment, which has fallen by half since 2010, but also because of the Great Recession. Corporations have chosen to move many jobs overseas where labor is cheaper, rather than investing domestically to improve the productivity of American workers.

The number of adults in the prime working ages of 25 to 64 – 173.2 million in 2015 – will rise to 183.2 million in 2035, according to Pew Research Center projections. (But) That total growth of 10 million over two decades will be lower than the total in any single decade since the Baby Boomers began pouring into the workforce in the 1960s.

The Nobel Economist Paul Krugman said it in his most recent NYTimes Op-ed: “Overall, the move of immigrants to some small cities has been very beneficial, one of the best hopes those cities have for economic resurgence, but the hopes will disappear if immigrants are scared off by a climate of hate;” (or driven out by MAGA Republicans, which is what Trump has been attempting to do).

We are now seeing an ageing Trump whose incoherence is becoming more obvious, especially since Vice President Harris exposed his mental deterioration during the presidential debate.

And MAGA Republicans are blindly following him into the rabbit-hole.

Harlan Green © 2024

Harlan Green on Twitter: https://twitter.com/HarlanGreen

Less Need to Worry in 2024?

 Financial FAQs

It’s time to catch our breath. Wars and protests can unsettle economies, but much of the economic uncertainty is for more mundane reasons.

The last few weeks have unsettled the financial markets, to say the least. The DOW and S&P are at record heights, but so are mortgage rates.

The initial Q1 2024 GDP growth estimate had shrunk to 1.6 percent vs. 3.6 percent in Q4 2023. Inflation has also been spiking in Q1, which has rattled the Fed so much that Fed Chair Powell had to reassure markets the Fed is done with raising interest rates but is taking a wait-and-see approach on when to cut those rates.

Inflation surprised to the upside in the first quarter, with the core personal consumption expenditures price index going up at a 3.7% annual rate after two straight quarters at a 2% rate of increase.

As if to highlight said uncertainties, the Atlanta Fed’s GDPNow forecast project is now showing a huge jump in Q2 GDP to 4.2 percent! How can that be when most economists are predicting no more than 2 percent Q2 growth?

Part of the answer is conflicting signals in the first quarter. Growth slowed because companies didn’t restock their shelves after a gangbuster holiday season for shoppers, even though consumers continued shopping in the New Year.

And businesses typically raise prices at the same time as most employees get their annual pay raises in January. The result was that soaring labor costs got ahead of things being produced, hurting labor productivity and further depressing those optimists that hoped inflation would continue to decline.

So Q2 is shaping up as catch up time. More things will be produced to increase supplies and help restock shelves, which will boost economic growth. That’s why economists are predicting better Q2 growth.

AtlantaFed

For starters, the Atlanta Fed’s GDPNow model estimate for real GDP growth I like to report (seasonally adjusted annual rate) in the second quarter of 2024 is 4.2 percent on May 8, up from 3.3 percent on May 2. Both consumer spending and real personal consumptions expenditures are growing; real personal consumption expenditures growth (consumer spending) is up from 3.1 to 3.9 percent and second-quarter real gross private domestic investment growth (capital expenditures) from 4.1 percent to 6.8 percent.

This is while the annual inflation indicators used by economists are at or close to 2 percent for both wholesale and retail goods and services. Inflation will probably remain slightly above 2 percent annually this year because consumers’ incomes have been rising faster than the production cost of things.

Quarterly labor productivity has been surging, despite poor first quarter results. Nonfarm business sector labor productivity increased 3.2 percent in the fourth quarter of 2023 I said last week, as output increased 3.5 percent and hours worked increased just 0.3 percent.

It’s not clear to economists if such a productivity surge has to do with happier workers receiving better salaries and benefits; or the increasing use of technologies such as AI because of worker shortages across many industries.

It’s probably a combination of the two. The contrast between Q1 and Q2 growth is going to be huge—Q1 will probably be upgraded in the 2^nd and 3^rd estimations with more information, as well.

That’s why markets should settle down, even with several wars and maybe protests continuing into the summer of a presidential election year.

Harlan Green © 2024

Harlan Green on Twitter: https://twitter.com/HarlanGreen

It's A Soft Landing

 Popular Economics Weekly

A terrific February employment report is further evidence the US economy has made a soft landing.

FREDemployment

Total nonfarm payroll employment rose by 275,000 in February, and the unemployment rate ticked up slightly to 3.9 percent from 3.7 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care, in government, in food services and drinking places, in social assistance, and in transportation and warehousing.

Education and Health created 85,000 new jobs, Leisure & Hospitality 58,000, and Government 52,000 more jobs. Construction, Retail trade, and Transportation- warehousing created another 62,000 jobs in February.

What does this really mean? That employment and economic growth have stabilized in a very good place, with more good new jobs created, the unemployment rate still below 4 percent and average hourly ages rising faster than inflation.

American consumers and Fed officials can breathe easier this year, and the Fed can begin to lower interest rates to hedge against the damage from future shocks to the economy, rather than worry about higher inflation ahead (i.e., the danger of deflation rather than inflation).

Former St Louis Fed President James Bullard believes Chairman Powell’s Fed will now lower interest rates sooner. Otherwise the Fed may get behind on rate cuts if the economy normalizes over the second half of the year, he said in an interview with MarketWatch’s Greg Robb. It would be awkward for the Fed to have inflation close to 2% with the Fed’s benchmark policy rate in the range of 5.25%-5.5%, Bullard said.

This is while “The price index for gross domestic purchases (GDP) increased 1.9 percent in the fourth quarter, compared with an increase of 2.9 percent in the third quarter. The personal consumption expenditures (PCE) price index increased 1.7 percent, compared with an increase of 2.6 percent. Excluding food and energy prices, the PCE price index increased 2.0 percent, the same change as the third quarter.”

Why has inflation fallen so dramatically? I’ve been saying there are a number of reasons, beginning with the fact that the supply chain of goods and services has caught up to the demand by consumers and companies after the pandemic. But also, labor productivity, the amount of goods produced per worker-hour, has risen sharply, largely because of new technologies such as AI, which has stream-lined supply chains and shortened delivery times.

FREDlaborproductivity

The productivity of American workers rose at a 3.2 percent annual rate in the fourth quarter. Year over year, productivity has increased by a revised 2.6 percent. That’s the largest increase since the first quarter of 2021.

This will keep inflation low for the rest of this year, maybe too low if the Fed doesn’t listen to Bullard, and the unemployment rate continues to tick higher in months ahead.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Higher Productivity the Key

 Financial FAQs

There is a major reason the US economy is doing well in so many ways—with plunging inflation, surging consumer spending, and the highest economic growth of developed countries—that is often overlooked in economic reports.

Labor productivity has been surging lately. It is the seed of our present prosperity as well as future growth. Non-supervisory workers are producing more per hour in the last three quarters that at any time since the COVID pandemic.

FREDlaborproductivity

Non-farm labor productivity has soared from a low of -2.4% to +2.7% annually in eighteen months (Q2 2022 to Q4 2023) as portrayed in the above FRED graph.

Why? Most economists say it’s because the US economy has been fully employed for so long—more than two years—that there’s a scarcity of workers, so employers have needed to invest more in capital expenditures—whether its AI or more efficient factories—to meet the demand for their products. This translates to workers being more productive, as they are running the new machines and software services.

Average employee salaries are also higher, and are now rising faster than inflation, which means even more demand for products, thus creating a positive loop. Higher salaried employees spend more, so companies will produce more.

That is why Jame Bullard, former St. Louis Fed President, believes Powell’s Fed Governors need to begin to shrink interest rates sooner rather than later.

Bullard, in an interview with MarketWatch’s Greg Robb, said Powell doesn’t want to wait until inflation is actually at the 2% rate. “That would be the ‘Honey I forgot to shrink the policy rate’.” It is a phrase credited to Chairman Powell, who feared that the Fed would react too slowly to the rapidly plunging inflation rate, causing perhaps a recession.

The Fed’s benchmark rate is now in the range of 5.25%-5.5%. The neutral rate is below 4%. There are only three Fed policy meetings before the third quarter of the year. “The math is not adding up that the [interest rate] is going to be at the right level,” said Bullard.

Another reason for the Fed to move more quickly in dropping rates is that wholesale prices are now falling more quickly due in part to higher productivity.

The Producer Price Index (PPI) for wholesale goods and services continues to plunge. PPI Final Demand is now up just 0.9 percent in 12 months, far below the Fed’s 2 percent target. It jumped 0.6 percent in January but monthly prices declined 0.1 percent in December 2023 and advanced just 0.1 percent in November.

And it is still trending downward. So where is risk of higher inflation down the road if the cost of raw materials is declining? There’s a disconnect in the reasoning of those who see a danger of higher inflation ahead, so let us hope that Powell means what he says and doesn’t forget to shrink the policy rate.

Harlan Green © 2024

Harlan Green on Twitter: https://twitter.com/HarlanGreen

Interest Rates About To Fall?

 Financial FAQs

Fed Chair Jerome Powell was as ambiguous as ever at yesterday’s post-FOMC press conference. He reported the Fed Governors decided no more rate hikes were warranted, but they needed to be more confident that inflation had been tamed before actually cutting their Fed Funds rate.

When asked by several reporters how much confidence was needed, he responded they needed “greater confidence” but couldn’t be pinned down on what that meant.

In fact, Powell’s Fed Governors don’t seem to understand the main cause of post-pandemic inflation. Most economists today attribute it to the worldwide economic shutdown that stopped production, which took years to recover, contributing to the scarcities that scared consumers—remember the toilet paper shortage?

So what caused such a precipitous drop in inflation, the fastest drop in post-WWII history? Supply-chains have recovered, and we are beginning to see a large jump in labor productivity, which is a significant increase in the amount of goods and services produced per worker-hour.

FREDproductivity

I maintain a major reason supply chains have recovered so quickly is the surge in labor productivity that began in the first quarter of 2023. And why not? There had been a large increase in capital expenditures in the second quarter of 2021 as companies ramped up production after the shutdown.

Capital expenditures, or CAPEX, is the seed-money that increases productivity by investing in new technologies and factories. It fell as per the above FRED graph when the Fed began to raise interest rates, but corporations were able to absorb the interest rate increases as their profits soared and the various PPE and PPI aid money began to filter into the equation.

“Nonfarm business sector labor productivity increased 3.2 percent in the fourth quarter of 2023, the U.S. Bureau of Labor Statistics reported today, as output increased 3.7 percent and hours worked increased 0.4 percent.”

This is why financial markets are now beginning to push back at Powell’s Fed Governors seeming indecision on when to cut interest rates.

MarketWatch reported that Mohamed El-Erian, chief economic adviser at Allianz, said in a post on X, the social-media platform formerly known as Twitter, Powell’s decision to push back against a March cut “is fueling more questions about the risks of the Fed being late again, albeit in a different direction.”

But the markets like to respond to facts rather than hearsay and we now have a huge revision to the GDPNow growth estimate from the Atlanta Fed that I’ve been following. In fact, GDP growth may be accelerating in 2024.

AtlantaFed

It’s revision said: “The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2024 is 4.2 percent on February 1, up from 3.0 percent on January 26.”

The revision came after this morning’s construction spending release from the US Census Bureau and the Manufacturing ISM Report On Business from the Institute for Supply Management, as well as first-quarter real gross private domestic investment growth—all showed sharp increases.

So, is the large jump in the Q1 GDP forecast too outrageous? Maybe not, because construction spending is soaring from the various government initiatives, such as the Infrastructure and Inflation Reduction Acts, and the Manufacturing ISM report has turned slightly positive after one year of decline.

Spending just on construction projects rose 0.9% in December to $2.1 trillion, the Commerce Department reported Thursday. It has risen every month in 2023. It is what the government and private companies spend on projects, from housing to highways.

And I also reported on the strong Q1 real gross domestic investment (Capex) growth above.

So, what will higher economic growth do to inflation? It hasn’t hurt the inflation decline to date. Why, because so much of the spending that goes into the GDP is on modernizing the US economy, further increasing US labor productivity.

Harlan Green © 2024

Harlan Green on Twitter: https://twitter.com/HarlanGreen

Retail Sales Will Save Us

 Financial FAQs

The debate is raging on when the Fed will begin to lower their short-term rates in time to prevent a recession. A number of pundits and economists, such as Nobel Laureate Paul Krugman, have said the inflation battle has been won. And most Fed Governors are now saying they should not raise interest rates any higher.

The problem is the bond market doesn’t’ believe so, even believes the latest robust economic data show growth not slowing enough to pacify the Fed, hence 10-year and 30-year bond yields are soaring above 4 percent and fixed mortgage rates above 7 percent in the expectation that the Fed will cause a recession.

Well, retail sales might save us from a recesssion. Sales are surging, far above consensus estimates, recovering from negative sales growth in February and March 2023. Consumers are supposed to slow spending when the Fed raises the cost of borrowing, aren’t they? What is going on?

FREDretail

“Advance estimates of U.S. retail and food services sales for September 2023, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $704.9 billion, up 0.7 percent (±0.5 percent) from the previous month, and up 3.8 percent (±0.7 percent) above September 2022,” said the Census Bureau’s press release.

I said last week economic growth is increasing because there has been a huge surge in job formation—336,000 new jobs in September alone with higher revisions in the past two months. And wages are now rising faster than inflation for the first time in years, so why wouldn’t consumers want to spend with the upcoming holidays?

And we have the Atlanta Fed in its latest forecast saying, “The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2023 is 5.1 percent on October 10, up from 4.9 percent on October 5. The consensus for Q3 economic GDP growth is a bit lower, probably in the 3-4 percent range.

I maintain there’s also another reason, a rise in what is called multifactor productivity, which measures capital inputs (machines, new technologies) as well as labor productivity, and it is soaring per the below FRED graph. It rose to 3.6 percent in 2021 from zero in 2020. This will create a greater supply of things, which puts downward pressure on prices, as do more workers producing more.

FREDproductivity

Is it because of the increased use of AI, which is a capital input? That’s too soon to know, but Doctors are already reporting more accurate diagnoses using AI to quickly find bad genes to determine what should be done with a cancer tumor.

“Over the last decade, the supply chain landscape has witnessed a transformative evolution, largely propelled by technological advancements. Such innovations as AI, the Internet of Things (IoT), blockchain and sophisticated data analytics have automated and optimized various aspects of supply management,” said an Institute for Supply Management article on automation.

The real key to staying fully employed while taming inflationary surges is also to avoid too much geopolitical uncertainty (wars), and preparing better for future pandemics that disrupt said supply chains.

Harlan Green © 2023

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Inflation or Deflation Next Year?

 Financial FAQs

FREDpersonalconsumption

The Fed’s favored personal consumption expenditures price index (PCE) has been on a sharp downward trend since June 2022 when it reached its 7 percent inflation high. Both its overall headline indicator (blue line) and core index without gas and energy prices (redline) are now rising in the 4 percent range.

A leading business economist that I like says inflation could plunge below the Fed’s 2 percent inflation target sometime next year. And that would mean a recession, so the Fed should begin to lower interest rates later this year.

“The forces that drove up inflation since the onset of the Covid pandemic are reversing rapidly,” said Ian Shepherdson, chief economist at Pantheon Economics, in a recent Barron’s article. “Over the next year, both the headline and core rates—the latter excludes food and energy prices—will drop sharply. By the end of 2024, inflation is likely to be below the Federal Reserve’s 2% target, and policy makers will be trying to stop it falling too far.”

This happened before under Fed Chair Alan Greenspan when the Fed’s prolonged rate hikes busted the housing bubble in 2007 and precipitated the Great Recession.

The inflation rate then sank below 2 percent for a prolonged period, which required Greenspan’s successor as Fed Chair, Ben Bernanke, to begin the various Quantitative Easing programs that pumped excess dollars into the economy to begin a slow recovery.

The main cause of inflation has been the supply shortages due to worldwide shutdowns from the COVID-19 pandemic. We know what happened to inflate grain and oil prices with the Ukraine War. But auto prices also skyrocketed with the shortage of chip supplies that are in all new cars.

Residential rents also soared, as work-from-home use also increased during and after the pandemic. Now rents are also returning to more normal levels.

To make his point, Shepherdson states, “Almost all of the eightfold increase in global container shipping costs has reversed, and domestic shipping costs also are falling rapidly. Semiconductor supply is back to normal, more or less, so vehicle production in April was higher than before the pandemic. About a third of the increase in auto dealers’ margins already has reversed.”

The labor market is the other shoe about to drop. The unemployment rate rose from 3.4 percent to 3.7 percent in May, with 339,000 new nonfarm payroll jobs created. This was because there are more workers in the workforce now than before the pandemic, which will slow the wage increases, another part of the inflation picture.

Most of the major economic indicators are either flat or declining, so now would be a good time for the Fed to anticipate what will happen next—a growing surplus of supplies as countries ramp up production that will further depress prices—rather than wait too long to react to changes as it did under Greenspan and during the pandemic.

It would be nice if the Fed allowed employees to keep their higher wages by not seeing rising wages in a tight labor market as the main cause of inflation. It would alleviate the record income inequality—the worst in developed countries—which in turn would help to calm the red state-blue state partisan divide, among other benefits.

We now have both hot and cold wars to win, so there’s no good reason to induce another recession.

Harlan Green © 2023

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Booming Retail Sales Confirm Holiday Rally

 Financial FAQs

 

FRED

September retail sales and food services presage a holiday season worth celebrating, despite supply shortages, worker shortages, and the pandemic. Seasonally adjusted retail sales are up 12 percent over last September, which means that the demand for goods and some services is at a historic high.

So the shortages are due to consumers and businesses buying more than ever, more than last year and all the years before, in spite of the supply shortages.

There’s little evidence of production shortages, per se, as much as a slowdown in getting to their destinations in ports such as Los Angeles and Long Beach, where more than half of all imports to the U.S. arrive.

NY Times Paul Krugman put up a FRED graph that illustrates the huge surge in the demand for durable goods—goods like appliances and vehicles that last more than three years. It tells us that said demand can continue above the average dotted trend line into the year end holidays.

FRED

The demand for services such as leisure activities and travel is lagging because the pandemic has kept many consumers at home. But that will pick up as well once the Pandemic is subdued.

And what if the Infrastructure and Build Back Better bills pass would add additional $ trillions to programs that boost businesses and improve consumers’ lives? Then the boost in demand for goods and services could be prolonged for…years.

Should we worry about inflation because too much money is in circulation, driving up prices? Not if it’s put to productive uses, as I’ve been saying. Both physical and so-called social infrastructure spending go into increasing productivity, hence a greater supply of goods and services, not excessive speculation in the financial markets as have past tax cuts from which the wealthiest most benefited.

Studies have shown that parents in such states as California that have some of the social infrastructure proposals in President Biden’s Build Back Better Act, such as paid family leave and child care, allow them more family time and resources to raise their children, thus reducing the number of children trapped in a cycle of poverty.

And better physical infrastructure will help to cure the supply bottlenecks. “In the longer run, investments in infrastructure could help much more: U.S. ports, rail lines and so on are shabby compared with their counterparts in other countries and could be much improved.” says Krugman.

So we really need to grow what one political scientist has termed our social capital as much as physical infrastructure, if we want a sustainable recovery. It can be done by improving people’s lives.

Harlan Green © 2021

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Why So Much Inequality?

Answering Kennedy’s Call

Epi.org

There aren’t many economists that still debate the origins of our record income inequality, the worse in the developed world, and even in some of the developing world.

A loss of $10/hour in the typical worker’s compensation is the result of employers’ successful efforts to keep wage growth down over the past 40 years, according to a new paper by EPI distinguished fellow Larry Mishel and EPI director of research Josh Bivens.

Mishel and Bivens maintain that while productivity increased 69.6 percent from 1979-2018, employees’ compensation increased just 11.6 percent, per the EPI graph.

How did this happen? The obvious reasons are the growing strength of corporations and loss of labor union bargaining power that has allowed states to pass anti-labor laws and American corporations to ship many high-paying jobs overseas with little government regulation that would mitigate the job losses of domestic workers.

But it goes deeper. It goes back to the origins of the so-called economic sciences and the economic theories that politicians utilize to rationalize their policies.

They really derive from political economics, the original pseudo-science that attempted to understand human’s financial behavior, which is not that difficult to understand when we are talking about dollars and sense.

The owners of companies and the capital that controlled them wanted few regulations and lower taxes. So from 1980 onward Republican administrations and Big Business began to deregulation whole industries, and the labor lows and practices that guaranteed employees their fair share of the profits under what have been called Laissez Faire or free market economic theories.

Less government oversight and lower taxation, for instance, was based on the supposition that it encouraged greater growth, since corporations would create more jobs to produce more goods and services.

Industries have become more productive, but the increased profits were kept by the owners and chief executives of those companies rather than passed on to their employees; so much so that the gap has widened between employee’s hourly compensation and productivity that doesn’t guarantee the majority of service workers a livable wage.

That justified lower trade barriers in turn, so that consumers with their reduced incomes could afford the cheaper goods now made made overseas.

Even the Supreme Court got into the act by allowing public employees to avoid paying any fees if they so choose, even though receiving all the benefits of union membership—higher wages, pensions, worker safety, the list goes on and on.

The Supreme Court issued a sweeping ruling in 2018 that dramatically undermined unions for teachers, firefighters, police officers, and other public employees throughout the United States.

The case, Janus v. AFSCME, involved a challenge to the practice of public sector unions charging “agency fees” to employees who decline to join the union but who still benefit from the deals it bargains.

And twenty-eight states have ridden the free market banner that have “right to work” laws banning agency fees. Such laws create a free-rider problem: People don’t have to join unions or pay agency fees to get the unions’ benefits, so the unions lose members and political influence.

There is an ongoing dispute over how much of the economic pie should be going to workers vs. the owners of capital, but not the fact that it has happened. Our badly degraded infrastructure and a warming planet tell us that public works have been badly neglected that would prepare US for future catastrophes as well.

The ongoing political and economic debate is how to right the fact that most of the rewards of higher productivity have not increased the public good, but diminished it. Mishel and Bivens are helping us to see that labor must have a greater voice in that debate.

Harlan Green © 2021

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen 

Why Our Endless Tariff Wars?

Popular Economics Weekly

Wrightson-ICAP

POTUS and the Trump administration can’t end their trade wars, although House Speaker Nancy Pelosi just announced they had reached agreement with Republicans on a new NAFTA accord with Canada and Mexico—now called the USMCA, or U.S. Mexico Canada Agreement—because it gives more protections to U.S. workers. She said there’s nothing wrong with a win for President Trump “when it’s the right thing to do (sic).”

But there is no agreement with even a Phase I trade agreement with China, and Trump has basically neutered the World Trade Organization that settles trade disputes by blocking any new appointment to its arbitration panel, which will not only prolong trade disputes but create new ones, since there’s no longer a mechanism for resolving them.

The result has been declining labor productivity and manufacturing output, which puts future economic growth in jeopardy. Productivity declined in mid-2019 after several years of acceleration, in part because companies reduced investment in manufacturing and production in response to the U.S. trade fight with China and the EU. The dispute has also undermined exports and made it harder for businesses to plan ahead.

Labor Productivity, or output per hour worked, declined for the first time since 2015. It fell at a 0.2 percent annual rate from July to September, the government said Tuesday. This means that the hours worked increased faster than output, so that it is increasing just 1.5 percent annually, which means workers will have difficulty improving their standard of living within their working lifetime. They haven’t been able to increase their median income since the 1980s, and trickle-down economic theory prevailed.

This was the theory that lower taxes and less government services lifted all boats, when it fact it only lifted the most expensive yachts. The cutback in government investments in such as infrastructure, education, and R&D, which all serve to increase productivity and efficiency, was another reason for the productivity decline.

And, “Productivity is likely to continue to lag unless there’s a rebound in business investment,” said MarketWatch’s Jeffery Bartash, “but that probably won’t happen unless the trade dispute is largely resolved.”

Higher productivity is the key to a rising standard of living, resulting in higher pay, more profits and low inflation. Low productivity is a sign of an inefficient economy.Productivity in the U.S. has risen at an average rate of just 1.3 percent since 2007, compared with a 2.1 percent average since the end of World War II.

There are better ways to settle trade disputes, such as remaining in trade alliances like the Trans-Pacific Partnership that Trump withdrew from. The other 11 Asian trade partners then drew up their own agreement to better bargain with China, in particular; whereas the U.S. has been unable to reach any agreement by going it alone.

So we know another path to increased productivity is the ability to get along with our economic friends and find a way to work with our enemies.

Harlan Green © 2019

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

The Historical Decline in US Growth

The Mortgage Corner

@GregDaco

Nonfarm business sector labor productivity decreased 0.3 percent in the third quarter of 2019, first decline in 5 years, the U.S. Bureau of Labor Statistics reported, as output increased 2.1 percent and hours worked increased 2.4 percent…From the third quarter of 2018 to the third quarter of 2019, productivity increased 1.4 percent, reflecting a 2.3-percent increase in output and a 0.9-percent increase in hours worked.

This almost arcane statistic followed by professional economists is one of two major reasons US economic growth has slowed to a crawl, as seen in the graphs. Individual workers are no longer producing as much per worker as they did through 2000, even with a fully employed economy and the introduction of modern technologies that boost production.

Another reason is declining population growth, as American mothers no longer produce enough replacement babies. A main contributor to the falling population growth rate is the decreasing fertility rate. The fertility rate has fallen from 3.7 in the 1960s to 1.9 today, when 2.1 births per mother is the natural replacement rate, leading to a lower increase in the US population (excess of births over deaths).

In fact, the national birth rate (12/1,000) still remains higher than the national death rate (8/1,000), which means more people are being born in the U.S. each year than are passing away. Additionally, the arrival of immigrants with larger families, has kept the U.S. population steadily increasing, albeit slowly.

I suggest that lower fertility is just the tip of the melting economic iceberg, because populations also increase with new immigrants. So we shouldn’t be cutting back on immigration quotas as the current administration is doing—to some 700,000 last year from the 1.3-1.4 million per year in recent decades.

And combined policy missteps—such as spending less on capital investments that would increase labor productivity and not introducing policies that would enhance birth rates; also better health care, family leave, more liberal vacation and sick leave policies are a start—as European countries have been doing.

This has kept U.S. GDP growth averaging 2 percent since the Great Recession, but no higher. EU countries have declining birth rates, unfortunately, which has knocked down EU GDP growth rates to around one percent.

But they also have greater longevity and better healthcare outcomes than the U.S., which is ranked 37^th in health outcomes by the World Health Organization. As in example, French residents now live an average 4 years longer than Americans, says Nobel economist Paul Krugman in a recent NYTimes Op-ed. “Why? Universal healthcare and policies that mitigate extreme inequality are the most likely explanations.”

There is much more that can be done to boost economic growth and income equality, in other words. Fixing schools would boost educational levels, switching to alternative energy sources would inject $trillions into new technologies and bring down pollution costs, fixing our infrastructure would boost productivity immediately by cutting down on commute times and lost work hours, and better enforcement of environmental regulations would decrease healthcare expenses as well as job losses due to ill health.

The list goes on and on. Maybe we do need a Green New Deal to make all this happen?

Harlan Green © 2019

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Why Make America Small Again?

Popular Economics Weekly

ResearchPew

Why make America small again is the question Americans should be asking President Donald Trump whose immigration policies are designed to do just that. He would reduce immigration flows by 50 percent, if he and his conservative supporters have their way.

The result would be stagnating economic growth because of the simple fact that immigrants are the main driver of population growth, due to the low birth rates of native-born Americans.

The U.S. birth rate is 1.8 births per woman, down from 3.65 in 1960, according to the World Bank. Demographers consider 2.1 births per woman as the rate needed to replace the existing population.

Economic 101 theory states that population growth is one-half of the equation for Gross Domestic Product growth (It’s population growth + productivity = GDP growth). Without adequate population growth, U.S. economic growth would stagnate, as it has in Europe and Japan.

In fact, the Japanese population has been shrinking for decades, which has resulted in a record government debt of some 200 percent of GDP. How else can the Japanese invest in their future but use their government to print money, when its own population contributes a shrinking amount to tax revenues?

And a 2017 report from the National Academies of Sciences, Engineering, and Medicine found immigration “has an overall positive impact on the long-run economic growth in the U.S.”

The best evidence of low native-born birth rates is that over the next five decades, the U.S. immigrant population of 45 million is projected to grow to a record 78 million. The growth rate of 74 percent will be more than double that for the U.S.-born population (30 percent), according to the PEW Study.

Then what does President Trump really believe would make “American Great Again,” if he restricts immigrant inflows, which would reduce U.S. population growth rates by more than half?

He and his supporters labor under a very ancient assumption (not based on fact) that resources are limited in a zero-sum game where one can only gain when others lose a share of income or wealth, or influence, or stature.

That was the mentality of the concentration camp that Nobel Prize-winner Eli Wiesal portrayed so graphically in Night, his description of conditions in Nazi death camps as a child.

It is unfortunately a picture that exists today, in which we are imprisoned in a world of declining resources. It also happens to be the mentality of fossil fuel interests that attempt to protect their limited and declining resources—and wealth that are the financial supporters of the Republican Party (such as the Koch Brothers).

They want to protect their very limited resources, whereas renewable energy offers the promise of unlimited energy resources, as does the Information Age and the Internet. This is a world that requires fewer restrictions of people and information across country borders.

American can only be small again in the Trump-Koch Brothers world of the last century, a world that seemed to have limited resources. There’s no part of America that would prosper with 14-foot-high border walls, or trade barriers, or immigration restrictions that are based on win-lose fallacies.

Such walls can only exist for those that still believe they are imprisoned in a past that no longer exists, or has any basis in fact.

Harlan Green © 2019

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

What Happened to Main Street?

Popular Economics Weekly

FRED

The main reason we have suffered from historically slow growth and stagnated wages since the Great Recession is in large part due to so-called trickle-down economics, the fallacy that concentrating most of the largess of economic growth on the private sector, and neglecting public sector growth in health care, environmental protection, education, R&D, and public infrastructure, for starters, means the US economy wasn’t paying forward its benefits for the next generations, as Senator Elizabeth Warren intoned at the beginning of her tenure.

It is the public sector that plants the seed corn for future, sustainable economic growth, which private businesses then utilize to create private sector jobs and profits. The US may have the greatest higher education and research facilities, but our elementary and high schools rank near the bottom in the developed countries.

We also rank much lower in health care and environmental protection, which lowers labor productivity and results in sicker workers. Isn’t it better for our country to improve the health and skills of workers (while paying them more) before we replace them with robots?

The Clinton administration made the most recent steps towards the goal of sustainable growth when it cut military spending and put a 2 percent annual increase limit on government expenditures that balanced the federal budget and actually created a surplus for four consecutive years—1996-2000.

But 9/11 and terrorism put the fear mongers back in charge and military spending surged, while public sector spending declined in those seed-corn sectors we spoke of. The result post-9/11 was that Fed Chairman Greenspan kept interest rates below the existing rate of inflation, which grossly inflated the housing market and resulted in the housing bubble.

GW Bush and Fed Chair Greenspan chose the less sustainable growth path when they cut taxes, reducing government revenues at the same time they had to pay for the wars on terror. Once again, budget deficits surged because government revenues declined, and we embarked on a path that led to the Great Recession.

We have the same lesson today. Conservatives and the Trump administration are lobbying the Fed to lower interest rates to boost stock prices further, inflating stock values that are already at record levels in the hopes that it will continue economic growth in the 11^th year of this record economic expansion.

There were 224,000 private payroll jobs created in June, economic growth last year averaged 3.2 percent, and first quarter GDP was 3.1 percent this year already.

Unnecessarily low interest rates inflate deficits and asset bubbles if not invested wisely. We really need to grow the public sector and Main Street in whatever way it can be done. Gradually boosting the national minimum wage above the less-than-living-wage of $7.25 per hour would be a good start. Boosting Main Street benefits will do the most to create sustainable, enduring growth—by paying it forward to the next generations.

Harlan Green © 2019

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Trade Wars Hurt US the Most!

Popular Economics Weekly

Econoday.com

Is the trade war hurting U.S. jobs? Yes, says Mauldin Economics’ Patrick Watson, among others. Watson uses US automakers as an example. Ford and GM estimate that the 25 percent steel and 10 percent aluminum tariffs will add $1 billion to their production costs just next year. What happens when they sell more vehicles overseas with such rising production costs?

“For GM and other auto manufacturers, the customers are increasingly foreign. In this year’s third quarter, GM sold 835,934 cars in China and 694,638 in the U.S. It built many of those directly in China and has every reason to make more there, with tariffs or not,” said Watson

General Motors is poised to end production at five plants in the U.S. and Canada, kill off several passenger cars – including the Chevrolet Impala – and slash 15 percent of its salaried workforce in a sweeping cost-cutting plan designed to boost profits and adjust to America's changing tastes in vehicles.

Is globalization reversing itself? The recent rise in US Labor Productivity highlights the growing use of robots and other productivity-enhancing technologies American companies are investing in due, in part, to the 3.7 percent unemployment rate and resultant dearth of skilled workers. But there are other reasons

Robots level product costs, since they cost as much in China as in the US, which means China will produce more domestically to avoid rising tariffs, and so needs to import less from others, including the U.S.

 The U.S. Bureau of Labor Statistics just reported nonfarm business sector labor productivity increased 2.3 percent during the third quarter of 2018, as output increased 4.1 percent and hours worked increased 1.8 percent. Declining unit labor costs over the past 12 months are the reason productivity has increased at the same time as output. It is down to 0.9 percent for a 3 tenths decline from the first estimate. This reflects a 4 tenths downgrade in compensation to a growth rate of 3.1 percent.

This should also mean U.S. workers’ wages are rising, but the trade wars are in fact driving many of the better paying manufacturing jobs overseas. Robots are shortening the supply chain, in other words, which will only hasten the decline in the need for foreign products.

And we are already seeing the result of the tariff increases on Chinese goods; a surging trade deficit. The trade deficit rose in October to a 10-year high amid a record shortfall with China (due to drop in soybean purchases), keeping the U.S. on pace to record the largest annual gap in a decade, reports the U.S. Bureau of Economic Analysis.

The deficit edged up 1.7 percent to $55.5 billion from a revised $54.6 billion in September. That’s the biggest shortfall since October 2008, and ironically, it stems in part from tariffs imposed by President Trump in an effort to reduce the deficit.

We know part of the recent surge in imports reflects American companies stocking up on Chinese goods ahead of the holidays to get ahead of another increase in U.S. tariffs that were supposed to kick in on Jan. 1. But the U.S. tariff increase has been temporarily been postponed until March, per agreement with China at the recent G20 summit in Argentina.

Even the 90-day postponement is not helping the stock market, since nothing concrete was agreed on at the G20 meeting.  But it is pushing interest rates lower, to levels not seen since the Great Recession.  This will help consumer spending, but only if the Fed doesn’t raise their short-term rates further.

Harlan Green © 2018

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

What Is ‘New Normal’ U.S. Growth?

Popular Economics Weekly

Graph: Seeking Alpha/BLS

There is a current debate whether the U.S. will escape the ‘new normal’ of slower economic growth since the Great Recession, when American households lost a collective $9 trillion in value and consumers cut back on their spending to make up for the losses.

It is part of the debate among economists whether the U.S. and other so-called ‘mature’ economies are locked into what is called secular stagnation, an era where markets can no longer expand enough to boost economic growth that benefits all segments of the population.

The answer, alas, is slower growth in the U.S. for the foreseeable future, unless the 80 percent of wage-earning consumers find a way to bring back their lost incomes that have barely kept up with inflation since the 1970s, or governments find a way to raise enough taxes to make up for the shortfall in household incomes by funding more public sector benefits, such as increasing the social safety net and public investments in education, infrastructure, and basic research that increase future productivity.

Why have workers’ wages and household incomes remained stagnant for so long? There has been a sharp shift of incomes and wealth away from the working classes to rentiers, or the owners of capital and their managers.

There was a sharp decline in labor productivity since 2007, for the same reason. Along with the Great Recession, businesses invested even more of their profits to enhance their own stock prices (and CEO salaries), rather than in new equipment and factories that would expand labor’s productivity, which is the preferred way to boost workers’ standard of living.

Economists also postulate that economic growth is the sum of the growth rates of labor productivity and population—the working-age population, in particular. The working-age population began its decline as baby boomers began to retire in 2001, and another six million of those workers have elected not to return to work since the Great Recession.

Graph: Seeking Alpha

The above graph illustrates that equation. When the worker population increased—particularly when women and baby boomers entered the workforce from the 1970s onward—the U.S. had 3 percent plus economic growth. But in 2001 the boomers began to retire and we have the current worker shortage.

Graph: Wikipedia

Real vs. Potential GDP charts as above show the departure from what would be its potential—when GDP growth averaged 3.25 percent, historically. Consumer spending makes up roughly two-thirds of aggregate demand, which is the economic term for total dollars spent for goods and services that make up U.S. Gross Domestic Product. When its other elements—net exports, capital investments, and government expenditures—also decline, we have slower growth, which has been the case since 2007.

Today we have an even worse labor problem—the current White House wants to cut back immigration quotas by 50 percent and deport as many undocumented workers, as possible—including Dreamer children who have grown up in the U.S.—when only immigrants and their offspring will provide enough working age adults to make up for the loss of the baby boomer workforce.

Harlan Green © 2018

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen