© 2014 by RedJandal. All rights reserved.

    October 2, 2018

    Please reload

    Recent Posts
    Featured Posts

    Pump it up, Uncle Sam!

    March 1, 2018

     

    The US economy does not look in serious need of stimulus. Unemployment stands at just 4.1%. Wages are rising albeit slowly and in December more than three million Americans quit their jobs, the second highest reading on record. In 2017 the economy grew by 2.5%. With the economy so strong, who needs more stimulus?

     

     

     

    Most of the stimulus will come from tax cuts that President Donald Trump signed into law in December. These are worth 0.7% of projected GDP in 2018 and 1.5% of GDP in 2019. In the new budget deal containing a further fiscal boost, defense spending would rise by USD 80bn this year, pleasing Republicans, and adding USD 63bn in spending on programs dear to the Democrats. The total increase in outlays is worth another 0.7% of GDP. The White House also promises to unveil an infrastructure investment program resulting in even more stimuli.

     

    What spooked the market?

    In theory, fiscal stimulus should force interest rates up, which explains investors’ recent jitters. According to the Fed, a tax cut worth 1% of GDP will eventually raise rates by 0.4 percentage points. If interest rates stay where they were before the stimulus inflation would get out of hand. But there are three reasons to doubt that enough inflation will appear to force the Fed to change course.

     

    The first is the prospect of another productivity surge. Productivity growth has been low since the financial crisis but is due to take off as we are heading into a second industrial revolution in which machine learning and artificial intelligence will allow firms to do much more with fewer workers. Just think about e-commerce and self-driving cars for a moment. There are signs already that productivity is rebounding. A recent real-time estimate of annualized GDP growth by the Atlanta Fed stood at 4% which points to very strong productivity growth this year.

     

    The second reason to expect inflation to remain subdued is the painful legacy of the financial crisis. Because the unemployment rate excludes people who are not seeking jobs, it could be masking potential labor supply. In April 2000 nearly 82% of Americans aged between 25 and 54 had jobs. Today, despite low unemployment, the proportion is 79%. The difference represents about 3.7 million potential workers: many people are neither working nor looking for work. You may add a steady supply of truck and taxi drivers displaced by self-driving vehicles in the next few years and you may see that there is not as much pressure on labor costs as currently anticipated.

     

    The final reason not to fear an inflationary surge is the stability of wage and price growth in recent years. Pay is growing almost exactly as quickly as one would expect from looking at the overall employment rate. Neither wages nor prices are likely to accelerate suddenly because low inflation expectations have become so firmly rooted.

     

    As a result, in 2018 and 2019 the US running an experiment. By stimulating economic activity when times are already good, it will find out what happens when the economy runs hot. For now, this is all good news for business: lower taxes and more stimulus will translate into more profits and more mergers and acquisition activity. With renewed volatility, we will say many opportunities to pick up stocks as we proceed through the year.

     

    Stay the course, you should do well with equities for the next two years.

     

    Switzerland, February 28th, 2018


     

    Share on Facebook
    Share on Twitter
    Please reload

    Follow Us

    I'm busy working on my blog posts. Watch this space!

    Please reload

    Search By Tags
    Please reload

    Archive
    • Facebook Basic Square
    • Twitter Basic Square
    • Google+ Basic Square