Published On: Thu, Jun 15th, 2017

The Fed’s economic forecasts differ wildly from Trump’s

There’s an enormous disconnect between the Federal Reserve’s projections for plodding economic growth and the White House’s rosier view. The Fed’s estimate stays stuck at the recent level, around 2 percent yearly. President Donald Trump’s hits 3 percent.

Both the Fed, which released its latest estimates Wednesday as it announced its rate-hike decision, and the Trump administration’s Office of Management and Budget, whose forecast came out last month along with its proposed spending blueprint, foresee an almost identical economic growth figure for 2017. For the Fed, it’s 2.2 percent; for Mr. Trump, 2.3 percent.

But then things diverge. The Fed, which only does estimates for three years, looks for a slowdown: 2.1 percent gross domestic product growth for 2018 and 1.9 percent for 2019. For the administration, the GDP picks up speed, with 2.5 percent next year, 2.8 percent in 2019, and then 3.0 percent each year through 2027.

Lately, GDP growth has been well short of soaring. For this year’s first quarter, it rose just 1.2 percent on an annual basis.

The administration bases its more optimistic view on the assumption that the Trump program of tax cutting and infrastructure spending gets enacted and delivers the intended results. Progress is slow on the former front, given Congress’ distraction over issues like the Trump campaign’s relations with Russia. Still, the Republicans do control both the House and the Senate, so some semblance of his plan could get passed.

“The foundation of the plan is 3 percent growth,” White House budget director Mick Mulvaney told the House Budget Committee last month. “In fact, that is Trumponomics.”

Skeptics are many, even within the president’s own party. “This budget presumes a Goldilocks economy,” said Rep. Mark Sanford, a South Carolina Republican. “It assumes the stars perfectly align with regard to economic drivers.”

To Joe Brusuelas, chief economist at tax and audit consultancy RSM, tax cuts would deliver merely a temporary boost. “Tax cuts are not a panacea,” he said. “They’re a short-term sugar rush.”

Mr. Trump won election on a promise to step up the sluggish pace of the economy. His challenge is to overcome some tall obstacles. The two biggest are:

Slow productivity growth. This has been on the downswing since before the Great Recession. From around 3.5 percent growth in 2005, it tumbled below 1 percent 10 years later. While it has nudged up a bit recently, productivity — how much economic output workers can create — has a lot further to go to generate the type of GDP growth that the president seeks.

“Productivity has increased 1.2% over the last four quarters, which is twice its trailing five-year annualized growth rate,” noted Joseph LaVorgna, chief U.S. economy at Deutsche Bank Research. For the economy to maintain 2 percent growth, that tempo would need to be maintained, he said. And that’s no sure bet.

The last productivity surge occurred in the 1990s, thanks to the greater efficiency brought on by the advent of information technology to the U.S. workplace. Since then, though, corporate capital spending has lagged, with companies citing a lack of consumer demand as the reason. According to the Census Bureau,  capital spending in 2015 (the last year available) rose a miserly 2.5 percent, far below the mid- to high-single digits that have been the postwar norm.

Demographics. When the enormous baby boom generation was in its prime and women were entering the workforce, an ample labor pool and burgeoning consumer spending helped drive the economy.

These days, the labor force — the currently employed and those who are looking — is only fitfully increasing, as an average 10,000 baby boomers are retiring daily. Retirees don’t buy as much as younger people, and don’t contribute to economic growth much because they’re not working. Immigration could make up some of the shortfall, but Mr. Trump wants to restrict it.

Trump-style stimulus could pump up GDP for a time. Still, warned Allen Bond, co-portfolio manager of the Jensen Quality Growth Fund (JENSX), “an aging population and declining workforce participation likely will bring growth back” to what the Fed envisions.

[Source”pcworld”]