While economic uncertainties remain, investors should not worry about the White House jeopardising the U.S. economy
There have been many negative projections on the future of US economic growth. Low unemployment rates and tighter monetary policy are expected to flatten the growth trajectory of the global economic engine. Stock market watchers warn of an imminent correction. The spectre of trade wars obscures the outlook for international cooperation.
However, Peter Hall, Chief Economist at Export Development Canada, is optimistic that the U.S. economy is poised to take off. Speaking at the recent “GLOBAL ECONOMY AND THE USA: Reflections for Canada and the World” seminar presented by the Wee Kim Wee Centre at SMU, Hall is adamant that many observers are missing the big picture. Hall and his team of economic and political analysts see the future differently: “We have consistently been a non-consensus forecast and we’ve actually been consistently right.”
Hall rejects the naysayers who predict an impending recession based on the duration of previous boom cycles. “Some are saying, 'We’ve already grown for seven years after the recession, isn’t it time for another recession?’ Well, it’s pretty hard to fall out of a basement window. We haven’t grown yet.”
He elaborates: "As a result of globalisation and improved communication technology, we have been able to include just about every economy in the world inside of the growth continuum. By simply buying technology off the shelf they can accelerate the process of getting out to the technical frontier of the production possibilities curve. The inclusion of that group of economies into the world economy has stretched out the growth cycle.”
Longer business cycles are the new normal and they are something businessmen and regulators need to be aware of. Says Hall: “We are going to create big cycles. We are going to have big bubbles, big recessions and big fluctuations in the economy. We’ve got to think our way through that at the company and policy levels.”
Growth ahead
Instead of a contraction, Hall sees tremendous potential for growth that will be driven by an often overlooked segment of society - millennials.
Currently, the percentage of 18- to 34-year-olds living at home in the U.S. is the highest it has been in 70 years. The job market has been brutal to new graduates with no work experience. Hall explains that the global financial crisis caused panic, causing “companies [to] get desperate and they let go of everybody right away. It was survival mode.”
Millennials were often passed over during the post-crisis recovery. “If you’ve got all kinds of displaced people out there in the market, companies are going to pick them first; those with experience will be the first to get absorbed. So millennials were left out in a really big way.”
Now, there are signs that millennials are returning to the job market. Taking a nuanced view of the employment figures, Hall finds cause for optimism in the increasing labour participation rate of millennials. “The labour market has tightened up to the point where real wages have increased," he points out. "Companies have said, 'Ok we don’t have unemployed highly skilled people that we can cherry pick. They aren’t just sitting around anymore. We actually have to bring new graduates in.'
"These guys are now re-entering the economy at a rate we have not seen. For the first time in seven years, there is a very significant uptrend in the labour participation rate.”
Millennials are also an important group of consumers. There will be many positive repercussions from the increased buying power of this demographic. “Millennials are first line consumers," Hall says. "They will be buying their first houses, buying their first cars, forming families for the first time and making all the expenditures related to that.”
Hall believes that the pent up demand for housing, a leading indicator of economic activity, will allow the market to grow by 15 percent over the next 18 months. An increase in household formation will lead to corresponding increases in the demand for household products and other attendant consumer goods.
The Trump effect
The biggest risk to the economic growth story is political intervention. Economic progress could be derailed by President Trump legislating populist policies that restrict trade. Globalisation has been blamed for the loss of jobs and the stagnation of wages. The effects of a populous pivot that imposes tariffs on imports will be damaging to the US and its trade partners.
Ultimately, Hall believes that the substantial gains from trade will outweigh the losses. While President Trump pulled America out of the Trans-Pacific Partnership (TPP), Hall thinks that NAFTA will not be torn up.
“Because it’s not just going to affect Canada and Mexico," Hall says. "It’s going to affect the US. We analysed the impact on American jobs of undoing trade with Mexico. 1.2 million American jobs are directly at stake.
"In Texas, the impact is somewhere around 360,000 jobs. You don’t mess around with Texas in the U.S. because they are a very secessionist state. They voted for Trump. He’s talking about putting 360,000 Texan jobs at risk. You think he’s going to do it? The data seems to argue against that.”
He adds: “Canada’s impact on the U.S. is 1.7 million direct jobs. They’re actually a more powerful case than Mexico is. 35 states in the U.S. call Canada their number one export destination so a lot of business activity is tied up in that. And most of those states voted for Mr Trump.
"We’re convinced it’s not easy to do the things he says he’s going to do. We attach a low probability to those incendiary policies.”
The president’s cabinet will likely advocate a more pro-trade stance. Says Hall: “It’s not just Donald Trump who understands international supply chains. He has made tons of money on international supply chains. Rex Tillerson did not operate inside of ExxonMobil for all of those years, rise inside the organisation and have a vacuous knowledge of international supply chain. Wilbur Ross has international operations inside of this empire. He depends on it as well.
"Steve Mnuchin, Head of Treasury, did not make lots of money on Wall Street by misunderstanding international supply chains. These are a group of people that completely understand how this works. If they want to throw a wrecking ball through an economy, then that’s one thing. The last thing they are going to do it is to throw a wrecking ball through their own financial empires.”
Hall understands the hesitance of companies in finalising their investment plans because of the uncertain environment. However, his advice is that it is a good time to look for opportunities.
“Stay at the table. It’s like ripe fruit on a tree. And the tree is laden with fruit at the moment. That’s what we’re telling businesses across Canada.”
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Last updated on 27 Oct 2017 .
