Friday, September 29, 2017

"Economy Growing Amidst Washington Chaos," UCLA Anderson Forecast, September 2017

We came into the year optimistic about pro-growth economic policies being initiated by the incoming Trump Administration. Those policies included substantial tax cuts, a major investment in infrastructure and regulatory relief. There has been real progress on the regulatory front, but nothing has really happened with respect to tax relief and infrastructure spending. Instead we have witnessed chaos with respect to immigration, healthcare and trade policies and a loss of confidence in the Administration over its handling of the neo-Nazi demonstration in Charlottesville, Virginia and the North Korea nuclear issue. Along the way there has been a revolving door with respect to the staffing of the White House. You need a scorecard to keep track of who is in and who is out.

Nevertheless, notwithstanding the chaos in Washington D.C., the economy continues to plow ahead with modest growth in real GDP and rather strong gains in employment. (See Figure 1 and 2) The employment gain has been even more impressive because it is occurring against a backdrop of a year-over-year decline in retail employment caused by the ongoing restructuring of that industry as online competition takes its toll. (See Figure 3) We would also note that the only other times we have witnessed year-over-year declines in retail employment has been during recessions.

Specifically we forecast that growth will continue with real GDP increasing by 2.1%, 2.8% and 2.1% in 2017, 2018 and 2019, respectively. The impact of tropical storms Harvey and Irma will modestly lower growth in the current quarter and possibly the fourth quarter from what it would have been and increase it in early 2018.  Although not intended the post-hurricane rebuilding, which could amount to $200- $300 billion of governmental and insurance funding, will act as if Congress passed a formal infrastructure package.  Indeed the dollars will flow far more rapidly compared to Hurricane Katrina in 2005 because FEMA is accepting applications via smart phones. But make no mistake, wealth was destroyed and that destruction is not measured in GDP. We would note that our 2018 optimism is based on the belief that Congress will ultimately enact tax cut and a formal infrastructure package later this year, more on that below. In this environment the unemployment rate will remain at or below the current 4.4% for the forecast horizon. (See Figure 4)

Figure 1. Real GDP Growth, 2007Q1 – 2019Q4F
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 2. Payroll Employment, 2007Q1 – 2019Q4F
Sources: Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 3. Retail Trade Employment, 2000 –Aug. 2017, Monthly Data, Change from Year Ago, In Thousands

Source: Bureau of Labor Statistics via FRED

Figure 4. Unemployment Rate, 2007Q1-2019Q4F
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Fiscal and Regulatory Policy

Despite the chaos we cited above we believe that Congress will pass both a tax and an infrastructure bill this year. Why? Nothing focuses the minds of Republican legislators than the thought of losing their majority. Thus the leadership on tax policy will come from Congress, not the White House. As a result we are assuming for modeling purposes that Congress will pass a $1.6 trillion tax over 10 years split evenly between corporations and individuals. Congress will set a 25% corporate tax rate while eliminating several business deductions and allow for the repatriation of overseas profit at a 10% tax rate. We would note that the tax reductions outlined here are well below the $5 trillion we were looking for last December. Moreover should President Trump’s recent dalliance with Democratic leaders Schumer and Pelosi become a longer term relationship then the cuts would tilt more towards middle and lower income constituencies than a more traditional Republican plan.

Of course to use an old economist joke, we are assuming more than a few can openers. Nevertheless President Trump and the Congress came together on postponing the debt ceiling issue and on an initial Harvey relief package. Although the debt ceiling agreement expires in December the temporary lifting of the ceiling will enable the Treasury to engage in extraordinary measures that will postpone a vote until the spring. Thus the risk of a government shutdown has been pushed back into next year.  However if we are wrong on the tax cuts, growth in 2018 will be slower than what we are now projecting.

On the spending side we anticipate at $250 billion infrastructure program and a material increase in defense appropriations coming from increased global tensions and especially with respect to North Korea which will make missile defense a top priority.  (See Figure 5) The tragedies along the Texas gulf coast and Florida resulting from the tropical storms will certainly light a fire underneath the Congress to act on infrastructure. The net result of these policies will increase the federal deficit to about $700 billion dollars in 2019. The deficit declines in 2018 because of proceeds from the repatriation tax. (See Figure 6)

Figure 5. Real Defense Purchases, 2007-2109F

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 6. Federal Deficit, FY 2007 – FY 2019F
Office of Management and Budget and UCLA Anderson Forecast

On the regulatory front the Trump Administration has started to roll back environmental, energy, financial and labor regulations. Whether this is good policy or not, it has begun to lift the regulatory burden on businesses and to be very frank, had there been a Clinton Administration businesses would have faced with a continuation of the regulatory onslaught that was characteristic of the Obama Administration.

Sources of Modest Strength 

Aside from defense the sources of growth over the next two years will come from consumption, housing (in 2018) and equipment spending. Real consumption spending is forecast to grow at just under a 3% clip next year and remain strong into 2019. (See Figure 7) Growth here is being underpinned by continued job growth, rising wages and tax cuts. In addition the automobile industry will benefit from the replacing of hundreds of thousands of cars lost along the Texas/Louisiana gulf coast.

Figure 7. Real Consumption Spending, 2007 – 2019F
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Given the economic backdrop housing activity should be doing much better than it has been. To be sure housing starts are continuing to increase, but the pace is rather modest. After recording 1.18 million starts in 2016, activity is forecast to increase to 1.21 million, 1.35 million in 2017 and 2018, respectively, and decline modestly to 1.31 million in 2019 under the weight of higher interest rates. Part of the sluggishness appears to be due baby boomers staying put in the houses they are already living in making it harder for millennials to enter the market.

Figure 8. Housing Starts, 2007Q1 – 2019Q4F, SA
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

In response to improved global growth, a rebound in oil drilling activity and the prospect of lower corporate taxation, real equipment spending is forecast at 4%+ pace though 2019. This will be a decided improvement over the 3.4% decline occurred in 2016.(See Figure 9) Further as labor markets continue to tighten the incentive to substitute capital for labor will increase.

Figure 9. Real Equipment Spending, 2007 -2019F
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Gradual Tightening of Monetary Policy

We have forecast rising inflation over the past several years. Although we were right in terms of direction, we have certainly been wrong with respect to the magnitude of the increase. In part the sluggishness in average compensation growth has been due the fact that higher paid retiring baby boomer are being replaced by lower paid millennials. Nevertheless both the monetary and Keynesian Phillips Curve (wage growth being a negatively correlated with the unemployment rate) explanations have been found wanting. But with the unemployment rate as low as it is, we believe that compensation increases will soon surpass 4% and the consumer price index will be increasing at a rate of at or above 2%  over the next two and half years. (See Figures 10 and 11) Simply put all of the kindling is in place to ignite a round of wage increases that will in turn elevate service sector inflation. It has just taken longer than we thought.

Figure 10. Compensation per Hour, 2007Q1 -2019Q4
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 11. Consumer Price Index vs. Core CPI, 2007Q1 -2019Q4

Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

In response to an economy operating at full employment and with inflation expected to run at around the Federal Reserve’s target rate of 2%, we expect a continuation of the moderate tightening policy that began last December. Aside from increasing the federal funds rate the Fed will be gradually reducing its bloated balance sheet that was created by three rounds of quantitative easing designed to offset the negative effects of the Great Recession.

In terms of the federal funds rate we are forecasting quarterly increases of 25 basis points starting this December, with a pause in March, and running through 2019. By then the federal funds rate would reach 3%, up from the current 1.125%.  (See Figure 12) Similarly the yield on 10-Year U.S. Treasury bonds is forecast to be on a path to 4%, up from 2.1% in early September. Because we have been forecasting a 4% 10-Year U.S. Treasury rate for a long time to no avail, this forecast is yet again another triumph of hope over experience. Nevertheless we are hard pressed to visualize say a 3% rate, in an environment of 4% unemployment, growing GDP, inflation over 2% and a rising federal deficit.

Figure 12. Federal Funds vs. 10-Year U.S. Treasury Bonds

Sources: Federal Reserve Board and UCLA Anderson Forecast


The economy has grown despite chaos in Washington and will continue to grow at moderate 2+% rate while operating at full employment. In response to a 2018 tax cut growth will pick up to about 3% before falling back to 2.5% and lower in 2019.  Growth would be underpinned by higher defense outlays and moderate gains in consumption, housing and equipment spending. Unemployment will remain at or below the recent 4.4% over the forecast horizon. Inflation will increase modestly running at a 2+ percent rate. The combination of full employment and somewhat higher inflation will put the Fed to continue its modest tightening path by raising interest rates roughly 25 basis points a quarter into 2019. Should we be wrong on the tax cuts, growth would be slower. Of course there is always the risk that dysfunction in Washington will spill over to the real economy.

Monday, September 18, 2017

My Amazon Review of Katy Tur's "Unbelievable: My Front -Row Seat to the Craziest Campaign in American History"

In the Eye of a Political Hurricane

In the spring of 2015 Katy Tur was living large as an NBC correspondent in London. She had a French boyfriend with whom she was going on a Mediterranean vacation in July.  However on a home trip to New York, of a sudden, the powers that be at NBC/MSNBC drafted her to cover the nascent Trump campaign. All the parties involved thought it would be a short term assignment. Little did they know it would last for 17 months and lead to a Cronkite Award for Excellence in Political Journalism for Tur.

In a very personal, candid and breezy style Katy Tur tells us of her getting caught up in a Category 5 political hurricane that was the Trump campaign. From the beginning she is attacked by Trump and as the campaign goes on she legitimately fears for her safety. So much so that NBC hires a security detail for her. Through her eyes we see Trump’s love/hate relationship with the press. He hates them personally but he is validated by them.

She gets very personal about her life on the campaign trail. She changes clothes in a car and falls in the snow while racing to catch a plane out of LaGuardia Airport. She lives on a diet of junk food and alcohol that makes it difficult for her to zip up her pants and look in the mirror. By reading her book I got to appreciate the hard work that journalist do to bring the news to me.

Although she does not like Trump, she is very respectful of his voters. To paraphrase Bill Clinton, she feels their pain. She recounts a vignette about a middle-aged woman who happens to be a hair dresser helping her with a curling iron in a restroom. Later that woman would be cheering Trump on with his personal attacks on the press. Tur gives a real sense of how decent people can get caught up in the madness of crowds.  Further, she practically alone at NBC sees Trump winning.

I have previously written what great team of female reporters NBC has put together. I call them Oppenheim’s girls, after Noah Oppenheim, NBC’s current news director. (See                                                                                                                       Along with Katy Tur, there is Kasie Hunt, Hallie Jackson and Kristen Welker. I honor them by calling them “girls” because they are the modern day equivalent of Murrow’s Boys. They truly represent an all-star team in any journalism league.

I have one last and very personal point. While she was growing up she had a family dog named Daisy. My three children who are roughly Katy’s age also grew up with a dog named Daisy. She was the best dog.

I highly recommend “Unbelievable” for anyone interested in the 2016 election and the role of journalist in the hothouse of a presidential campaign.

Saturday, September 16, 2017

My Amazon Review of Richard White's "The Republic for Which it Stands: The United States During Reconstruction and the Gilded Age, 1865-1896"

History with a 21st Century Liberal Bias

Stanford professor Richard White is a distinguished historian; I only have amateur status. While reading White’s encyclopedic history of post-civil war America you get the impression that he is looking to shock the sensibilities of 21st Century liberals by highlighting racism, the plight of laborers and farmers, the corruption of government and the greed of the emerging capitalist class.

To be sure the post-civil war era was no bed of roses, but if Lincoln came back from the dead and looked upon the America of 1896 he would have been largely pleased. The Whig in Lincoln, after all he was an admirer of Henry Clay’s American  System,  would have been pleased to see the success of the Pacific Railway Act, the Homestead Act and the Morrill Act (land grant colleges). America truly became a country from sea to shining sea, surpassed Britain as an industrial power and was about to take its place on the world stage. Of course as White rightfully notes the Native Americans were far from being partners in this process. Nation building is messy.

The free labor Lincoln might have been a bit disappointed in that industrial workers instead of being free were in fact “slaves” to the industrialists. This last point White makes over and over. However industrial workers were far from being slaves and far from being a majority of the workforce and even with the urbanization that took place in the 30 years after the civil war, America was still an agricultural country with a small town economy. And as bad as factory conditions were, immigrants from Europe continued to pile in. Simply put higher real wages and freedom remained a big draw.  Moreover, White ignores the rise of the middle class who would read the muckraking journals that were just beginning to make their appearance in the 1890s.  

The idea that White doesn’t seem to get is that the America of the 1870s was an “emerging market.” Where he is shocked about the governmental corruption that took place, I view it as a stage in the growth of the economy. Industrialization is messy and that is why crony capitalism and emerging markets go hand in hand. He also makes a side comment that American growth was slow compared to some of the faster growing economies of the 20th century. Of course it was because America was inventing the stuff that the 20th century economies had the benefit of copying.

Although White cites the excellent work in Robert Gordon’s “The Rise and Fall of American Growth,” he doesn’t take it to heart. (See )   Productivity growth was strong and real wages were rising. The U.S. was experiencing a “good” deflation, not a bad one as gains in productivity were translated into lower prices. Indeed the return to the gold standard, which White is critical of and it had a lot to do with the deflation, but it laid the basis of America becoming a global economic power at the dawn of the next century. The late 1800s truly were truly an age on invention and the locus of invention was largely in America.

All of the class issues that White discusses were fought out in the election of 1896. William McKinley’s defeat of William Jennings Bryan was a resounding vote for the gold standard and against the class-based reforms proposed by Bryan. Highlighting the rise of the new middle class is the fact that 750,000 people visited McKinley’s home to hear him give campaign speeches. These folks weren’t the tribunes of capitalism or White’s downtrodden workers and farmers, but rather they were of the rising middle class.

The one area where I know Lincoln would have been disappointed is the failure of reconstruction. Here the Republicans punted and turned the south over to the Ku Klux Klan, the armed wing of the Democratic Party. As White notes, the Republican traded the south for the west. I wish he would have spent more time on President James Garfield, whose was shot at the beginning of his term. If there was anyone who could have halted Jim Crow, it would have been him. We will never know.

I am sure White’s book will win its share of awards, but for me it was a disappointment. He should take off his liberal blinders and look at the world as it was.

Thursday, September 7, 2017

From Murrow's Boys to Oppenheim's Girls

At the start of World War II in Europe Edward R. Murrow, the legendary CBS news chief operating out of London, put together a team of radio broadcasters that would bring the realities of the war in Europe into millions of American homes. His team included such luminaries who would build CBS news into a television powerhouse in the postwar era included William L. Shirer, Eric Severeid, Charles Collingwood, Howard K. Smith and Richard C. Hottelet.

The modern day analogue to Murrow's Boys appears to be what I would characterize as Oppenheims's Girls. Oppenheim being Noah Oppenheim, NBC's current news chief. His "girls" are anchor/correspondent Katy Tur, chief White House correspondent Hallie Jackson, and political correspondents Kasie Hunt and Kristen Welker. These four women acting as a team are covering Washington and the Trump Administration as if it were a foreign country and just as Murrow's boys did 77 years ago they are bringing insightful reporting into the homes of millions of Americans.  

Nevertheless there is one problem that this all-star team has to deal with; they are associated with highly partisan Left that appear nightly on MSNBC at night thereby hurting their credibility. So my advice to Noah Oppenheim is not to let the partisans get in the way of straight news.

Friday, September 1, 2017

My Amazon Review of Sean McMeekin's "The Russian Revolution: A New History"

Russia Turns Red

Historian Sean McMeekin has written a very readable revisionist history of the Russian Revolution.  The perspective of the book is to look at the revolution from outside in. Hence we learn more about the opposition to Lenin rather than an inside out view which would focus more on the Bolshevik leadership. According to his archival sources McMeekin clearly portrays Lenin as a German agent who brought the financial resources of Hohenzollern Germany with him to overwhelm both his critics on the left and the forces of the provisional government.

In McMeekin’s view both the Tsar and the Russian army were in far better shape than what other historians have argued. I think he stretches here, because if it were that strong the army would not have collapsed as fast as it did under the weight of the Leninist policy of turning an imperialist war into a civil war by subverting the Russian draftees.

He argues, I think correctly, that Lenin was blessed by his opponents. The liberals who brought on the February/March Revolution were inept and the Socialist Revolutionary government under Kerensky was perhaps even more inept. When the time came for Lenin to strike in October/November, the provisional government was a mere shell.  Thus the revolution was more a coup d’├ętat than a real revolution. The revolution would come with the bloody civil war that followed the coup.

During the civil war period McMeekin highlights how split the opposition was and how unified the newly formed Red Army was under the leadership of Trotsky. Trotsky wisely utilized the officer corps of the defeated Tsarist army to build his new army and utilizing Russian gold reserves, Lenin was able to keep the army in the field. Nevertheless millions of lives were lost in the three year civil war as the country nearly starved to death and was saved by Herbert Hoover’s relief mission. One last note McMeekin tells us that the Cheka, the predecessor to the KGB, was founded to break the strike of banking, railroad and communication workers, so much for proletarian solidarity.

Therefore I highly recommend the ”The Russian Revolution” for history buffs like myself.