ECONW Shop Talk: Bob Whelan's 2018 Economic Outlook

Whelan_square.jpg

I see the economy slowing down. By the end of 2019, there could even be a recession. That is quite a contrast to where we are now.

Today, the economy is in great shape. In the last recession the country lost 8.7 million jobs. But remarkably, for 82 straight months, the U.S. economy has added jobs. So far that is 16.9 million jobs. We are in the third longest period of economic expansion in history.[1] Nationally, inflation is running at less than 2 percent. Wages are rising faster than inflation. The stock market is hitting all-time highs. While the national numbers are great, the local ones are even better.

So why do I have such an outlook? It is simple. The economy is running out of the fuel it has been using to grow for the last 7 years. We are low on productive workers people available to go back to work and many of those that are available are unskilled.

The overhang of empty houses, factories, and offices in 2010 from the last recession has evaporated. To grow now you need to build new capacity, buy land, train the unskilled, and compel people reluctant to work to take jobs. All of these inputs cost more than ever, yet are no more productive and, possibly less productive, than before.

The condition we are in now is a consequence of growing faster than the long-term growth rates of the working-age population, capital, and productivity combined have. It has not been a big difference, but it has been going on for so long now that the economy is apt to slow because we have absorbed most of the available, lower cost resources.

Just look at labor markets. Labor productivity is rising only 0.9 percent a year.[2] Combine that with virtually no growth in the working age population (a demographic problem exacerbated by falling immigration) and there is not much to propel the economy much more than we are seeing now.[3] Look at technology, another source of growth, and the evidence is mixed. In some ways the Internet raises productivity, but some research suggests it does as much harm to productivity.[4]

Locally, the paucity of available workers is a serious problem. The unemployment rates in Washington and Oregon are at records lows. Idaho’s is just a fraction from hitting its historic low.

Labor shortages are being reported in Seattle.[5] Portland has a shortage of construction workers so severe that in spite of very high wages, 10,000 jobs go unfilled.[6] Things are no better in Idaho, where jobs paying over $28 an hour with free training are going unfilled.[7]

The low-hanging fruit on the capital side of the equations has also diminished. In every expansion, according to senior economist Carsten Valgreen at Applied Global Macro Research, profit margins of non-financial companies rise and then start to decline. In past cycles, the onset of recession has come no later than five years after margins peaked. That last happened in late 2014, which if history prevails, will put us into a recession by late 2019.[8] 

At this point, I believe the recession will be mild—that is, unless we wildly over-build, like we did in the mid-2000’s. That is not to say that some over-building could be happening driven by optimistic expectations about demand and prices.

__________

[1] Swanson, Ana. “U.S. job growth surges in July.” The Washington Post. August 4, 2017.

[2] Leubsdorf, Ben. “U.S. productivity rose at 0.9 percent rate in second quarter.” The Wall Street Journal. August 9, 2017.

[3] Federal Reserve Bank of St. Louis. Economic research database at https://fred.stlouisfed.org/series/LFWA64TTUSM647S

[4] Morris, David. “Young American men are choosing video games over work in staggering numbers.” Fortune. July 16, 2017.

[5] Tu, J., Lerman, R., and Gates, D. “Heated local economy has employers working hard to fill jobs.” The Seattle Times. June 17, 2017.

[6] Manning, J. “21 Cranes, 15 hotels, 10,000 jobs: Inside Oregon’s development spree.” The Oregonian. July 17, 2017.

[7] Maben, S. “Want a job running a dozer? Idaho is offering free 3-week training in June.” The Spokesman Review. March 20, 2017.

[8] Epstein, G. “Can the expansion last into 2020?” Barron’s. June 26, 2017. Page 33.