Economists get plenty wrong, but they have been right about one thing: The U.S. economy is stuck in low gear.
On Thursday, the Commerce Department reported that gross domestic product in the fourth quarter grew at an annualized rate of 2.1% from the third, matching economists’ forecasts. It was up 2.3% from the fourth quarter a year earlier, which happens to match the projections that Federal Reserve policy makers made in December 2018.
The details of the report offered a mixed bag of pluses and minuses. The pace of growth in consumer spending, which accounts for about two-thirds of overall U.S. demand, slowed to 1.8% in the fourth quarter from 3.2% in the third. A narrowing trade gap boosted growth, but a sharp decline in the pace of inventory accumulation cut into it.
Most economists, and the Fed, expect GDP growth will be stuck around 2% in the years to come. That is partly due to demographics: The population is growing more slowly than it used to, and aging as well. So growth in the labor force has moderated. And since the labor force produces the stuff that goes into GDP, GDP growth will be constrained as well.
The other factor is productivity, or how much workers can produce in a given amount of time. Productivity growth has slowed markedly in recent years, and there doesn’t seem like there is anything that can make it suddenly lurch upward.
It was hoped, for example, that the 2017 corporate-tax cut would induce companies to step up capital investment, and that would lead to increased productivity growth. Instead, business spending has been weak. Even if that changes, there are delays between the purchase of labor-saving equipment and that equipment’s installation and successful implementation.
Likewise, infrastructure plans such as the one House Democrats unveiled earlier this week might provide a short-term spending pop. Even if successful, they would take time to meaningfully boost productivity. Plans to improve education outcomes, and thereby create a more productive workforce, would carry even longer gestation periods.
So maybe 2% growth is all one can reasonably expect for now. From a certain standpoint, that isn’t so bad. It appears to be enough, for example, to keep the labor market strong. And it is better than the growth that much of the rest of the developed seems likely to generate.
But when it comes to the profits companies generate in the U.S., which after adjusting for inflation can’t easily grow at a faster pace than the economy over the long haul, it is a bit of a bummer. Investors who are hoping for something better might be doomed to disappointment.
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