'The Boom is Back'
What a difference six years can make.
The first time career economist Steve Slifer presented his popular end-of-year Economic Outlook conference on Daniel Island, his message largely focused on a nation still healing from what has been described as the greatest financial crisis since the Great Depression.
Fast forward to 2016 and the forecast has improved considerably. At his seventh annual event at the Daniel Island Club, Slifer was proud to report “the boom is back.” A packed ballroom of guests from all over the Charleston region sat attentively as Slifer provided his take on the nation’s current economic status and what we can expect down the road. As is typical for Slifer, he was cautiously optimistic.
“All is pretty good!” he said, in kicking off the program.
And Slifer should know. He has been an economist for almost 40 years, beginning his career with the Federal Reserve in Washington. That was followed by two decades as Chief U.S. Economist at Lehman Brothers. Slifer now runs his own consulting firm, NumberNomics, has written two books and is considered one of the top economists in the country.
The two percent rut
To begin his presentation, Slifer turned to the Gross Domestic Product (GDP), one of the best measures of our nation’s economic climate.
“We’ve been stuck in this two percent rut for a while,” he noted, referencing one of the 100 plus slides he prepared for the program. “More importantly, what can we do to speed it up?”
The nation’s “economic speed limit” can be an effective indicator of where things are headed, Slifer continued. To determine that figure, he combined the labor force growth and productivity growth.
“If you know how many people are working, and you know how efficient they are, you can probably figure out how many goods and services they can produce,” he said.
In the 90s, the two numbers added up to about 3.5 percent. Today, we’re at 1.8 percent. He predicts it will increase to 2.8 percent in 2020.
“The economy ought to be up in the 3.5 percent range in the good times,” Slifer explained. “And we’re obviously disappointed that it’s not doing that.”
Productivity today is about 50 percent lower than it was 20 years ago, Slifer said, and while economists don’t have a really good handle on why that is occurring, he offered some potential causes to his audience. First, the “baby boomers” are all retiring, which is taking a considerable number of employees out of the labor force. And it seems companies are not spending as much on growing productivity.
“Productivity growth is largely determined by the pace of investment spending,” Slifer said. “And that’s dried up. It was growing 8 percent a couple of years ago and it has stopped.”
Why is that? Slifer has some ideas. He cited a number of potential contributors – including a corporate tax rate of 35 percent (the average corporate tax rate around the world is 23 percent) and dual taxing on corporate earnings (they are taxed once overseas and again in the U.S. if earnings are repatriated).
“A lot of these overseas earnings are staying overseas,” he explained. “And they’re not bringing them back to the United States. Nobody knows quite how much money we’re talking about – but I’ve heard numbers anywhere from $2.5 to 4 trillion. So that’s problematic.”
Also impacting growth is what Slifer calls a “crushing” regulatory burden (the federal register is more than 80,000 pages), a dysfunctional health care system, and unstainable fiscal policy. Today’s budget deficit is about $500 billion, he said.
“The debt in relation to income is just going to get higher,” he continued. “By the end of the decade it gets to what I would consider a dangerous level.”
Calling on Washington
So how do we tackle these issues, while helping to spur investment spending?
“The solutions to these problems will require some sort of action by our policy makers in Washington,” said Slifer. “In my view, our economy has suffered because of the gridlock we’ve had in Washington for the last eight years or longer.”
Enter President-Elect Donald Trump. Slifer is hopeful the new Commander in Chief will do his part to get things back on track. His first course of action could be lowering the corporate tax rate to around 20 percent, noted Slifer, which would “put us back in line with the rest of the world.” Trump could also decide to allow U.S. companies to bring overseas earnings back into the country at a tax rate of 10 percent.
“You can imagine three or four trillion dollars being taxed at 10 percent – that’s 300 or 400 billion dollars-worth of tax revenues,” Slifer said. “That’s a good thing...I’m really excited about that particular piece if it comes to pass.”
President-Elect Trump could also ease regulatory burdens – getting rid of what Slifer calls “unnecessary, needlessly complex, overlapping” regulations that hinder some members of the business community. In addition, he could make extensive revisions to Obamacare, said Slifer. All of these potential actions, along with cutting individual income taxes, are likely to increase revenues, bring down the deficit, and get the economy growing again, predicted Slifer.
“I think it’s a fairly reasonable, well thought out plan,” he said. “I get encouraged about that and it makes me hope that we’re going to have a little bit of a change in fiscal policy as we go forward...It’s my hope that that unleashes a wave of investment spending which in fact gooses up productivity growth.”
Looking ahead to 2017-2018
Consumer confidence is up, reported Slifer, and there are “lots of reasons why we ought to feel good.” With the stock market at a record high and debt (in relation to income) at its lowest rate in 20 or 30 years, there is reason for optimism, he said.
“If we want to go out and spend a little more quickly, we have the ability to do that.”
Slifer also pointed to readily available credit, a growth rate of 170,000 new jobs per month, and a drop in gasoline prices as reasons he expects to see a 2.5 percent growth in consumer spending over the next several years.
“Remember, we’re two thirds of the pie, so you have a core piece of this GDP that looks like it’s going to grow at reasonable rate.”
Other positives noted by Slifer – home sales are at the fastest rate they’ve been thus far in the cycle and demand continues to exceed supply. Additionally, mortgage rates are still relatively affordable and well below what they were 16 years ago. On the rental side, supply is short and the vacancy rate is down to the lowest it’s been since 1985.
“If you want to go and rent somewhere in areas around the country, you’ll have a really hard time finding an available property,” said Slifer. “Given that, it’s not surprising that rents are on the rise, steadily accelerating at 3.5 percent in the last year.”
Slifer also reported a rise in car and truck sales – another revealing statistic.
“Autos and housing are our two biggest ticket items in our budget,” he said. “If we’re getting antsy and nervous, those are the places that you see that slowdown first, and there is absolutely none. So everything I see related to the consumer looks pretty positive.”
Tough on Trump
While Slifer is encouraged by the new change in leadership in Washington and what that may mean for the economy, he hopes President-Elect Trump steers clear of negativity.
“Trump manages to talk about a lot of pretty ugly stuff,” Slifer told his audience. “...He’s talking about building walls, putting tariffs on goods coming from China, taxes on firms that choose to go overseas. I’m an economist. I don’t like any of that sort of stuff. This goes back to Econ 101. Trade is good, right?”
During his campaign, Trump often criticized U.S. companies for sending thousands of jobs overseas. Slifer argues that giving companies a more business-friendly environment at home will encourage them to stick around.
“I’m hoping that as we evolve, we’ll get away from all of the nastiness he was talking about before and try to encourage US firms to stay here.”
There is reason to focus on the positives, added Slifer. While he noted that the year 2020 is the earliest the country may experience another recession, the potential increase in U.S. companies’ coffers, a slow raising of rates from the Federal Reserve, a modest uptick in inflation, and a potentially record-breaking expansion are all encouraging.
“This (current) expansion started in June of 2009,” added Slifer. “...If it lasts until June of 2020, that’s 11 years...it’s going to go down in history books as the longest expansion on record...It doesn’t get much better. I really believe that if we can get some of these policy changes that we talked about…it’s really going to get us out of this slow growth mode and lots of good things will happen in the interim.”
Ultimately, Slifer predicts that GDP will increase to 2.3 percent in 2017 and 2.6 percent in 2018. When one audience member asked if there are any storm clouds we should be watching for, Slifer called on his trademark optimism to finish out his presentation.
“I’m proud that I’ve stuck with a reasonably upbeat scenario, when you think about all the ugliness that everybody gets scared about – and, man, economists love to talk about bad news and the horrible, nasty things that can happen. But this economy has been going now for a long time and it looks like it’s going to keep going...If we can really pull off some of these positive things, it just really might get better... I’m not giving up yet!”