Fellow Gen Xers may agree that one of the most memorable television stars of the late 1970s was Mikey from the Life cereal commercials. Mikey was a finicky eater who hated everything, and so he was enlisted as a taste tester for his brothers who were reluctant to try a new cereal that was “supposed to be good for you.” But when Mikey heartily dug in—causing his brothers to exclaim “Mikey likes it!” —millions of impressionable cereal-eating Gen Xers were told that they would too.
Shortly after his rise to fame, Mikey became a Gen X urban legend for reportedly dying from an overdose of Pop Rocks candy and Coca Cola that caused his stomach to explode. As an impressionable Gen Xer, my heart was heavy over Mikey’s fate until just prior to writing this blog I discovered that Mikey is alive and well (though no doubt limiting his consumption of carbonated beverages and not tempting fate)!
This tall tale of Mikey’s demise from a sugar explosion reminded me of the recent stock market run-up and the increase in business optimism. Is this just a “Trump sugar rush” that will end like the urban legend of Mikey, or will it end a whole lot better like the real-life Mikey? Against a tidal wave of economic pessimism from both the left and the right, I am going to stick my toe into these troubled waters and make the case for sustained optimism just the same.
The case for pessimism is based largely on demographics, healthcare costs, the crowding-out impact on spending (notably home purchases) by the obscene costs of higher education, displacement from automation and political intransigence. All of these factors conspire to limit economic growth and depress labor productivity. This could keep us in a 1.5%-to- 2.0% growth never-never land indefinitely if a recession doesn’t beat us to the punch. Among the notable groups in this pessimistic camp are the U.S. Federal Reserve and the Mortgage Bankers Association, which forecast average GDP growth of 2% or less for a decade.
From an optimistic view, there are several policies of the Trump administration and secular forces favoring the U.S. that could significantly bend the curve of GDP growth upward to 3% and beyond. These include:
- Business Spending Increase: While many top economists view the aging population as the primary driver of the decline in U.S. productivity, I blame it more squarely on the fall-off in business spending, R&D in particular, which is still well below its peak in 2009. The combination of less regulation and lower corporate taxes, including the repatriation of hundreds of billions of dollars of overseas earnings at a materially reduced tax rate, will give corporations a lot more money to invest. This spending will have a spillover positive impact on labor productivity, which has been the elephant sitting in the corner of every economic room.
- Consumer Boost: It’s not rocket science that lower personal income tax means more consumer spending. While upper-income brackets (where much of the proposed tax benefits will lie) save more than they spend on a percentage basis, their consumption will increase. As consumption represents two-thirds of the U.S. economy, this is a big deal.
- Regulatory Reduction on Energy Production and Transportation: The Trump administration has already reduced regulations on the fossil-fuel industry. While some of this may lead to an immediate boost to GDP through greater energy extraction and transportation construction, the impact on economic growth over the long term is even brighter. U.S. energy independence is no longer a dream, it is within our grasp through the combination of renewable and fossil fuels.
- Regulatory Reduction on Financial Services: Credit expansion for single-family homebuyers is an area of financial deregulation that can be an enormous boost to the economy. Homebuilding is one of the largest GDP growth drivers and it has never fully recovered from the Great Recession. At its peak in 2005, homebuilding added about 6% to GDP. It currently stands at about 3.5%. As CBRE Research studies have shown, more millennials are moving to the suburbs today rather than urban areas as they age and form families. We expect increased demand by millennials for single-family housing, and loosening some financial regulations will spur this on.
- Infrastructure Spending: If done properly, we could boost GDP significantly short-term by more infrastructure construction and long-term by more efficient transportation. As I mentioned in my prior blog, “A Little Bridge,” the biggest roadblock to this isn’t inefficient federal spending (though there is a real risk of 435 bridges to nowhere), but local-market “NIMBYs” who have paved a road to slow growth with good intentions.
I left my rose-colored glasses at home and I too worry a lot about demographics, the disruption from automation, higher education costs, political intransigence and the drop in productivity. At the same time, the simple math of these and other positive changes can get our economy beyond the 1.5% to 2% never-never-land to real growth of 3% and beyond again. Mikey lives and so will the U.S. economy! Pass the Pop Rocks and Coca-Cola.
All of the above and more was covered at my recent presentation ‘The Curve Benders’:
By Spencer Levy, Head of Research, Americas, CBRE.