Why Productivity Growth Is Trump’s Biggest Challenge
President Trump’s biggest foe isn’t the liberal media.
Nor is it illegal immigrants spilling over a weak U.S. border.
It isn’t the Red Army amassing in the South China Sea, either.
Oh, and Obamacare looks quite innocent in contrast to the greatest threat to Trump’s presidency.
What could possibly be so daunting?
It’s simple, really…
Take a look at the chart below and you’ll notice that U.S. productivity growth is a crapshoot at best:
Are your eyes bleeding yet?
Bottom line: Productivity is far too weak for the American economy to hit desirable levels above 3%.
Yet you’ll recall that President Trump categorically insisted during his campaign that he would raise GDP growth anywhere from 3.5–4% on the low side to 5–6% on the high side.
Last week, I underscored the similarities between Trump’s and Reagan’s first days in office. Let’s hope the two administrations diverge on productivity. That is, because productivity suffered during the Reagan years.
I asked my senior analyst, Martin Hutchinson, to see if President Trump has a card up his sleeve to boost productivity — the foremost driver of economic growth.
Click below to find out.
Chief investment strategist, Wall Street Daily
Question: Martin, we’re all wondering how President Trump is going to achieve faster economic growth. Can you shed some light on this for us?
Martin Hutchinson: Well, I’m sure President Trump’s wondering it too. What he needs to do to get faster economic growth is to get productivity growth up. Without productivity growth, we will get poorer, not richer, because we’ll produce less for each hour we work.
And in 2016 through the third quarter, productivity growth was zero. Which is an appalling number. The first estimate of first-quarter GDP wasn’t wonderful either. It was only 1.9%. And 1% of that was inventories piling up, which doesn’t do you a lot of good.
Productivity growth has been lousy for some years now. It’s only 0.6% per annum since 2011. When you can compare that with the past — I mean back in the golden days, 1948–1973, it was 2.8% per annum. And it was 1.9% in 1973–2010. So it’s been dropping for a long time, but it’s dropped off pretty sharply in the last five–six years.
Question: OK so, productivity clearly is the key here. But why’s it been so lousy, and what can be done to improve it, Martin?
Martin Hutchinson: There are three possible explanations out there. One is from Professor Robert Gordon, who says we’ve invented all the good stuff. And so as we invent less and less that’s really good, productivity growth slows to zero.
Peter Thiel said the same thing: that when we were kids, we thought we’d all have flying cars by now, and all we got was 140 characters — the thing you have for Twitter. It looks plausible at first sight, that — but I don’t believe it. If you look around, the number of developments coming — like driverless cars — it’s going to have a huge effect on productivity, particularly driverless trucks.
Then there’s robotics. That’s clearly going to vastly improve productivity. Then there’s genetic engineering in the slightly longer term, which can also have all sort of effects of productivity.
Those are all big things equivalent to electricity or the automobile — or even the computer — that will make a huge difference.
Question: That’s the big one, but it’s probably not going to happen, at least not overnight, Martin. So what are the other two reasons that productivity has lagged or been so lousy?
Martin Hutchinson: One of them is regulation. The EPA was founded in 1970, and productivity growth sort of went on a sharp downward trajectory in 1973. That suggests there’s a connection between the two and that regulation has dammed the exuberant productivity growth we had postwar.
Regulations, of course, have got more stringent under President Obama. He was very keen regulator in all sorts of areas. That’s good news, really, because regulations are what Trump’s going to reverse. He’s going to deregulate. He’s already pushed two pipelines that Obama had stopped happening, and he’s really going to do a big deregulation effort.
The final possible explanation for productivity lag is funny money. All these zero interest rates that we’ve had since 2008. Because if you’ve got artificial interest rates that are held down way below their natural level, then this affects the investment flow and people invest in rubbish — huge buildings that don’t get filled and so on.
You can see the effect on China, as well. If they invest in unproductive things, of course that doesn’t do anything for productivity. Austrian economists call this malinvestment. I think this is probably the reason for the big malaise since 2010. The reason I think so is that productivity growth has been bad everywhere with the zero interest rates. It’s been truly terrible in Japan. It’s down in the EU. And it’s been bad in Britain as well. That looks like a possible explanation for the last few years.
Now, Janet Yellen is slowly pushing up interest rates and is showing signs of moving rather faster. Partly because she thinks Trump’s going to be inflationary, I think. That too may be alleviated.
Question: Can you just give us the bottom line on productivity? What can we all expect through your eyes, Martin?
Martin Hutchinson: I think that with deregulation and with interest rates going up a bit faster, productivity growth should leap in 2017 and 2018. Go back to historical levels of around 2%, instead of zero. That will give us faster economic growth, probably of 3% or 4%. And that’s very good news for all of us.
The problem is that if part of it is Janet Yellen raising interest rates, then that’s likely to crash the stock market. But on the other hand, even if our investments don’t do all that well, at least our personal earnings as people will, and there will be lots of job opportunities around at decent wages. For the economy as a whole, this has to be good news.
Question: Amen to that, Martin. Thank you. You mentioned the stock market crash. Can we touch on the possibility of a major correction next week?
Martin Hutchinson: I’d like to talk about that, yes.
Senior Analyst, Wall Street Daily