What do we want? Growth! When do we want it? Now!
With apologies to all you hippies, this take on an old protest chant encapsulates the frustration felt by many Americans in response to today’s sluggish economy. But higher growth may be coming sooner than we think.
When Donald Trump introduced his 2018 budget proposal in May, his projected 3 percent GDP increase (gross domestic product is the sum of all goods and services produced in the United States) was widely criticized by experts and the news media as unrealistic and overly optimistic.
Growth frequently exceeded 3 percent prior to the 2008 global financial crisis. What’s surprising about the current recovery is the lack of growth compared to past recoveries — an anemic 1-2 percent. Many economists predict this will continue, even though 3.3 percent growth was the norm from the 1970s to 1990s.
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There’s a lot of speculation about the cause of these slow growth rates. Most economists agree that lack of aggregate demand is the culprit. Aggregate demand is the sum of consumer spending, private investment, government spending and net exports.
Besides low growth, the current recovery is characterized by persistent low interest rates and low inflation. This may partially explain the incredible performance of public equities this year, particularly in Europe, Asia and emerging markets.
According to NPR.org, the U.S. economy grew at a 2.6 percent annual rate in the second quarter, which ended June 30 — up from 1.2 percent annual growth in the first quarter. Consumer spending, which makes up 70 percent of the total U.S. economy, was up nicely. We’ve now entered the 96th month of economic expansion since the Great Recession, the third-longest expansion on record.
Economic growth is essential for creating investment opportunities and higher living standards around the world. The driver of future economic expansion may be found in financially healthy consumers. Technology advances in the cloud, cybersecurity, data analytics, mobile computing and robotics may increase productivity. Creation of a new middle class in developing countries should contribute to higher growth as well.
Current conditions point to more growth. A strong labor market, low borrowing costs and modest inflation could prolong the economy’s expansion. This will be positive for asset prices, including stocks and real estate.
Keep an eye on growth for the next few quarters. You may be surprised to see the return of the elusive 3 percent after all.
Mark Daly is managing director, investment office, Daly & Vachek Investment Consulting Group of Wells Fargo Advisors. dvig.com.