The U.S. unemployment rate is down to 3.6%. Economic growth was 2.9% in 2018. This is very good news but how long will it last?
According to Nancy Lazar, the CEO of Cornerstone Macro, the good news is likely to continue indefinitely. Here is why:
- Manufacturing started to shift back to the U.S. from China in 2010 due to higher construction costs in China. Investment in the U.S. started to pick up in 2016 and then gained strength in 2017 and 2018 due to the cut in the corporate tax rate.
- Year over year productivity accelerated to 2.4% in the first quarter of 2019, the strongest in over eight years. For example, productivity growth averaged only .6% from 2011 – 2014. During the 1990s, productivity growth grew from zero in 1993 to 4% in 1999.
- Today with roughly 2% productivity growth and 1% labor force growth, maximum potential GDP growth is 3%. Ms. Lazar expects 2.8% growth in 2019.
- Long term, interest rates will likely stay lower for two reasons: 1) inflation is going to be lower for a longer period, and 2) expectations for the lack of Federal Reserve tightening will hold down long term yields.
- How long can the good news last? A deterioration in productivity growth started in 2002 as companies shifted investment away from the U.S., with a 40% tax rate which was one of the highest in the world. All of this has now been reversed.
- Income inequality is a serious problem. But real median family income is up 15% since 2011 and is now a record high. Consumer income expectations are now at the same record high levels as in the 1990s.
Summary. Our current economic expansion is robust and is therefore likely to continue indefinitely.