Economist Steve Slifer expects U.S. economy to continue to chug along

Earlier this month, Steve Slifer, former chief U.S. economist for Lehman Brothers and former senior economist at the Board of Governors for the Federal Reserve, gave his annual economic outlook presentation and left attendees with another upbeat message and positive forecast.

Slifer, who also owns the firm NumberNomics, educated and entertained a large crowd at the Daniel Island Club on Dec. 5 with his presentation, “It’s Not Pretty — But It’s Still Chugging.”

If you’ve attended any of Slifer’s previous annual forecasts, you might think that you’ve been listening to autoplay, repeat.

And for good reason. He’s been giving upbeat positive outlooks for multiple years, describing the 10-and-a-half year growing economy as the longest on record and predicting it will chug along and continue to grow until at least 2022.

He acknowledged that manufacturing is weak but the good news is that manufacturing makes up a relatively small portion of the economy.

And the reason he predicts the economy will keep chugging along at about 2.4% is because 60% of the Gross Domestic Product (GDP) comes from consumer spending.

CONSUMER SPENDING – 60% of GDP

“The thing keeping us going is all of us as consumers. And what is keeping us going is we just keep on creating jobs, wages are going up, so we have the ability to spend,” Slifer said. Adding, “Being good Americans, if you give us money, we are going to spend it.”

Slifer noted that consumer confidence is high, the stock market is setting high mark records, jobs are being created, unemployment is at a 50-year low, compensation was up 4.5% last year, and demand for home sales is strong.

He described that new job growth is smaller than in the past but he doesn’t see that as a negative indicator because he attributes it to a labor shortage, clarifying that there are more job openings than people to fill them.

In regards to consumer debt, Slifer noted that consumer debt is growing but so is income. He noted that debt payment as a percentage of income is at one of the lowest levels seen in 40 years, explaining that consumers can afford higher levels of debt because income is going up and because rates are low.

He also shared good news in regards to real estate, noting that new home sales are strong and would be even stronger if there were more houses available for sale. He also credited low interest rates with high housing demand. Similarly, he explained that multi-housing vacancies were below 7%, numbers not seen since the mid-1990s.

Slifer’s Prediction: Consumer spending should be steady at about 2.5% in 2020.

INVESTMENT SPENDING – 15% of GDP

Investment spending makes up 15% of the GDP and Slifer offered an interesting analysis, “This is the piece that differentiates my forecast from many of my colleagues so we need to think about this one a little bit.”

Following the 2016 election, Slifer explained, investment spending surged 7% as the Trump administration’s tax cuts and deregulation boosted confidence. But, Slifer noted that an incoherent trade policy has dampened confidence and investment has slipped to 1%.

Activity at manufacturing firms has been steadily declining for a year, Slifer said, and manufacturing is currently in a mild recession. “Manufacturing is having tough times because exports have plunged — that is tariffs,” he said.

But Slifer said not to get too depressed about weakness in manufacturing because it makes up a small piece of the pie and that the other 89% of the economy, the nonmanufacturing sector, is doing OK.

He noted that business confidence has weakened somewhat but that companies are spending on technology as a way to increase productivity and that this will account for an increase in investment spending in the future.

Slifer’s Prediction: Expect investment spending to rise 3% in 2020.

TRADE – 10% of GDP

Slifer explained that trade only makes up 10% of the GDP. “It matters but it isn’t going to make or break us,” he said.

“I’m an economist. I believe in free trade. I learned that in Econ 101,” Slifer said. But, he explained that not all countries play by the same rules — some countries, like China, cheat, and that is what has led to the trade war.

“Everybody loses in a trade war,” Slifer said, “However, not everybody loses equally.”

Only 10% of the U.S. economy is dependent on trade, according to Slifer, but trade makes up half of the GDP of many other countries’ economies. While the U.S. is going to lose, it is going to lose less than everyone else. And, as a result, foreign investment in our economy is much more attractive then investment in other countries, he said.

Moreover, as the trade war drags on, businesses adjust to tariffs and rebuild their supply chains. According to statistics provided by Slifer, U.S. imports from China fell 20%, but imports from Vietnam increased by 40%.

Slifer’s Prediction: Trade will have little impact on growth in 2019 and 2020.

GOVERNMENT SPENDING – 15% of GDP

Slifer’s Prediction: Federal government spending should increase 4% in both 2019 and 2020 as the result of increased defense spending.

ECONOMIC SPEED LIMIT

“How quickly can the economy grow at full employment?” Slifer asked. He answered his own question by explaining that the economic speed limit is the sum of labor force growth plus labor productivity.

He noted that in the 1990s, the U.S. had a 1.5% labor force growth and a productivity efficiency of 2% for a combined speed limit of 3.5%. When compared to 2018, labor force growth was .8% and the productivity efficient was 1%, which produced a much smaller 1.8% speed limit.

For 2020’s prediction, Slifer explained that if investment grows at 3%, productivity should be steady at 1.7%. And if labor growth stays a .8%, then the economy will continue to grow at about 2.5% (0.8% + 1.7%). This is largely attributed to technology and the efficiency it creates, he said.

THE FINAL WORD

“All systems go,” Slifer quipped. He expects the economy will continue to expand in 2020 at about 2.4%.

When will it end? It’s still not in sight, he said. The U.S. economy is already experiencing a record period of growth at 10.5 years, and he predicted it could extend to 12 or 13 years.

The presentation was sponsored by Baird, Wells Fargo Advisors, Charleston Digital Corridor, Charleston Regional Business Journal, Daniel Island Business Association., Daniel Island Town Association, NumberNomics, and Trident Technical College.

ECONOMIC FORECASTS
2018 2019 2020
GDP 2.5% 2.3% 2.4%
Unemployment Rate 3.9% 3.5% 3.4%
Inflation (Core CPI) 2.2% 2.4% 2.8%
Fed Funds Rate 2.3% 1.6% 1.6%
10-year Note 2.8% 2.0% 2.2%
30-year Mortgage 4.7% 3.9% 4.1%

STILL CHUGGING IN 2020!

Potential GDP growth: 1.8% to 2.5%
Faster growth in compensation:
2.0% to 4.5%.
Faster growth in standard of living:
1.6% to 2.3%
Inflation accelerating: 2.2% to 2.8%.
Fed keeps rates unchanged at 1.6%
Great environment for stocks.
New highs.