The town of Chewandswallow always amazes me. Tickling the funny bones never stopped, either for me or for the four-year-old who I read “Cloudy with a chance of Meatballs” to; always, always, it ended with me brainwashing him – if it is too easy, better look out and behind. Listening to the State of the Union Address this Tuesday, I thought of a song “Money for nothing, growth for free”. Dire Straits did not write it, but the lyrics aptly describe how I think of the state of the Union as does the allegory of Chewandswallow.
The state of the Union is strong, but risks at the margin may swallow the good times.
US economy is booming, and that nobody can deny. The unemployment rate has been at four percent or below for eleven consecutive quarters, last time it happened was in 1971; post-WWII, in only about fifteen percent of quarters the US had unemployment at or below current reading. Based on World Bank data, US GDP is projected to be within one percentage point of global growth on a rolling five-year basis; last time that happened was in 1981 and only a few times before that since 1965. Given that the US accounts for almost one fourth of the global economy, each person contributes more than five times the global average, this is no easy task. To be noted are unusually low crime rates across the board, high school graduation rates are at historically highest level, the teenage pregnancy rate is at all-time low and Black unemployment rate at a historical low. All great news for the US and for peoples more directly impacted.
So, does the forecast call for meatballs tomorrow? Not quite.
Average expansion since 1950 has lasted 67 months, at 115 months and counting, we are most certainly at a late cycle. Let’s consider the chances of the game going beyond the 11th inning.
Average hourly earnings grew at almost three percent annualized for six months now, last time earnings grew at three percent was in April 2009. It is great that earnings growth doubled from October 2012, it vindicates a tight labor market that shows signs of strain. When one combines that with manufacturing and capacity utilization data, inflationary pressures on the economy become hard to ignore.
Indebtedness at all levels – individual, corporate and Federal – are at historical highs. US Federal debt is at USD 22 trillion (~ USD 67,300 per head), and that does not include unfunded liabilities of Social Security and Medicare. Corporate Debt as a percentage of GDP went from 40% in 2010 to 46% now. On top, US household debt is at all-time high of USD 13.3 trillion; even younger Americans are saddled with the burden – more than two-thirds are graduating each year with an average debt close to USD 30,000.
A closer look at what caused the surfeit of great economic news highlights another red flag. Deficit-financed massive corporate tax cuts juiced up the economy thereby unleashing some of the animal spirits so vital. That said, the central premise of the tax-cut – increased level of investment spending by private enterprises – was erroneous, as data bears out.
Wages, capacity utilization, lack of new investment incremental boost, the highest level of indebtedness – all point to Fed Funds rate hike, despite what the Minutes said last time.
The State of the Union highlighted three more worries in the medium term – trade war, potential shutdown, and a prolonged anti-immigrant stance. Nobody questions that IP theft by Chinese companies is real and sustained; an aggressive tariff showdown is bound to hurt. General Motors closed several factories before Christmas at a cost of thousands of jobs and blamed it on tariffs, Apple blamed China for its recent debacles, and so on. Some researchers are expecting 10% tariff on USD 200 Billion or more of Chinese imports. With secondary impacts, retaliatory tariff and other worries, tariff war is expected – as a base case – to shave half a percentage off of US GDP in 2019. Undercurrents of anti-immigrant stance – ostensibly undocumented, but hard to silo as such – were unmistakable in the State of the Union. Beyond platitudes of the US being an immigrant nation that has for decades depended on those fresh off the boat to work harder and innovate faster – or the irony that a Wall will have to be built by Mexican workers, if and when – a wrong-headed policy is sure to cost American businesses and US citizens; US companies are finding hard to locate qualified workers and Baby-Boomers are retiring by the thousands every day. That brings us to the sword that might drop end of this week – another government shutdown. Because it is so close to the last one we can almost call it one continuous shutdown if it happens – and the havoc it will cause from delayed decision making or action at Federal level is simply beyond comprehension.
No wonder then a survey of professional Economists by the Wall Street Journal put the risk of recession next year at 25%, highest since 2011; almost half of those surveyed predicted a recession to start by 2020 and over three-fourth saw a greater risk of the economy is on the downside.
There could be sunshine though. Infrastructure spending is a sure win-win, though it is hard to see how a Federal program (debt-financed) could pass the Congress; a repeat of US Highway program – it levied taxes on select items to pay for the buildup with zero Federal funding – is a non-starter. A promise of a reduction of drug prices is hollow as it did not come with an action plan; defunding Affordable Care is not the first step. It is laudable to look at a USD 7 trillion, and growing, the bill for war-fighting in the Middle East and say: “enough”. But it will be foolhardy to do it, as done recently, without consulting Generals on the ground and thus not prepping the field for our absence.
And that gets me back to “Dire Straits”, which could be an apt description of US geopolitical/economic situation if you go behind the curtain and look at the crystal ball past the glamor of sprinkled nonsense. We could hope all we can for conditions to turn our way while all we do is to make it worse. Or, we can try for real unity and work on shared values to work on long term solutions for infrastructure, immigration, opioid crisis and the like. It is exactly how framers imagined it, and it is exactly how the system was built to sustain – with the right leadership.
Or, we could just hope for a shower of meatballs today, tomorrow and the day after…
[Partha Chakraborty is CEO of Switchboard Systems, an early stage Blockchain technology startup. All opinions are of the Author alone, and do not necessarily represent that of Switchboard Systems. The author alone is responsible for any error or omission.]