Chris Thornberg ~
I should point out that I've been in the forecasting game for about two decades now. I started this at UCLA when I was working on UCLA Forecasts. What’s amazing is that I still remember my first year at UCLA when my boss at the time picked up the paper and said, “There goes those Chapman guys running their mouths again.”It was at that point in time that I got myself involved in the rivalry between the two Anderson Forecasts. Stunningly, it took me 17 years to actually sit down on stage with Dr. Jim Doti, and personally I am thrilled. Dr. Doti has been a staple in this community for many, many years. So to say the very least Jim, it’s about time.
You know, it’s funny because they do call economics a dismal science. That's a famous expression, and I'm an economic forecaster, which I guess makes me a predictor of a dismal, right? You could add it up that way. Yogi Berra once famously said that forecasting is tough, particularly forecasting the future. I think that I’m a pretty good forecaster, not that I'm right. Yet I don't think I've ever produced one correct forecast. I don't think there is such a thing. I say I'm a good forecaster because usually I’m not as wrong as most forecasters. It’s true thatcertain forecasts are more accurate than others, even in fields such as weather forecasting. For example, do you remember how last year was supposed to be our big wet year because of El Nino, and this year was supposed to be nice and dry? Well, those forecasters sort of missed that forecast by a major mile or two. And of course, the political forecasters have taken the biggest beating over the last few months. If you're wondering where all of this is going, it obviously has to do with the election last November. Nate Silver used the 538 Website. He’s a number genius. In the previous two elections, he predicted every state correctly or close to correctly. This being said, he’s been the gold standard of political forecasting. And yet, we know what happened on the morning of November 8th. He called for a 71% chance of Hillary winning, and we all know how that went down.
Now, in Nate Silver’s defense, in his blogs he was dismissing his own numbers. It was interesting how he just didn't feel right. The numbers to him just didn't make sense and they didn't seem right. Ultimately, he had his own cynicism or skepticism, and whichever way you want to put it, it turned out to be true. So now we have a brand new administration, and I woke up on November 9th looking at the ceiling, and among the many other thoughts going through my head, there was this thought -“Wow, I really have to think about the forecast because I have been implicitly running with these numbers too.”In other words, I’dassumed that there would be four more years of the same policies that we had seen under the Obama Administration in the context of predicting what was going to happen with the U.S. economy. So needless to say, I had to think long and hard about what all of this meant. And I'll give you the short version of what I've been telling everybody regarding the election of Donald J. Trump to the office of President of The United States of America. It has dramatically changed our forecast for the economy - we’re just not sure how yet. So needless to say, the biggest issue we're dealing with right now is major uncertainty. There is uncertainty in terms of the kinds of policies that will get pushed forward, how they will they get pushed forward, and what kind of impact they will that have on our economy over the next couple of years. These are still questions that are working themselves out of the system, and we are close to the first month of this particular administration. Aren’t we over 30 days now or something like that? Candidly, at many levels, there's no more certainty now than there was on November 9th.
I’m going to talk about three things really quickly. I'm first going to talk about where the election came from because I think that’s important, and then I’m going to talk about where our economy is right now. Lastly, I want to talk a little bit about what Trump’s administration may mean for our economy over the next four years. Those are three distinct questions. So the first question is: Where did this victory come from?In any newspaper you read, you'll repeatedly hear these words: The anger of the electorate. Americans are pissed off, and they put Trump in the White House to create change. Why are they upset? What is making them so unhappy? Well, listen to the rhetoric. American families have not experienced a rise in the last 15 years of the crushing burden of the Affordable Care Act, and we have secular stagnation, declining productivity, excessive taxes, reduced business investment, our U.S. manufacturing output decimated by trade, crime on the rise, inner cities in decline, the energy sector hurt by excessive regulations, immigrants stealing U.S. jobs, a record number of discouraged workers, income inequality at record high levels, federal debt levels out of control, and the Fed holding interest rates at a dangerously low level. Wow! Sounds like our economy is a mess, and people felt in need of a change.
Nowwhat's interesting is that I’m a guy who studies numbers and follows the trends, and I do my best to interpret what’s happening out there. I can actually sum up the anger of the electorate in one word. It's a word that sums up exactly where we are, and it's a fantastic word because it captures all of this so well. The word is miserablism. Now you may be wondering what this word means, and I actually had to look it up when I found it in The Economist about a year ago. I love that The Economist is constantly expanding my vocabulary because there's nothing English people love more than words with five or more syllables. It turns out that miserablism is a philosophy of pessimism, or of desperately trying to convince people that things are much worse than they actually are. This makes up so much of the rhetoric that we're hearing about our economy. Whether it's at the local, national, or state level, we continue to delve into what I call miserablism. Now why would we do this? The answer to this is somewhat like a strategy, but let me talk about some of my favorite miserableists.
Everyone knows that according to Louis C.K., life is horrible. He constantly tells us how horrible life is, but of course along the way he's making millions of dollars. I also like to point out that The Wall Street Journal is a major miserablist. They love bad news. Why? Because bad news creates market volatility, which creates trading, which drives commissions, and which in turn drives profits. The Wall Street Journal is all about bad news. Another group of miserablists out there is the network news. At some point in time in the last ten years, one of their MBAs ran a statistical correlation. It turns out that a lot more people watch network news when bad things are happening than when things are fine. Pick your network - FOX, MSNBC, CNN - every time you turn around you will see that there's some screaming crisis running across the screen and they're constantly convincing you that the world is about to end. They do this because it drives up the ratings. And then of course, we have our own “Miserablist in Chief” - a man who's most compelling argument to be President of the United States was, in my view, really centered upon painting the most dismal picture of the U.S. economy out there. I'm not saying that miserablism is exclusive to Donald Trump becausethat’s not true. Bernie Sanders, our good friend on the left, is equally as pessimistic about the end of the world.It is very true that the vast majority of candidates all had nothing but terrible things to say about the U.S. economy, and they all claimed that they alone had the policies that could resolve its problems.
Yet here's the reality - things aren't that bad. Things really aren't that bad. It's amazing how Americans have convinced themselves how terrible things are. Why? Take, for example, GDP. We’re used to experiencing growth in GDP, and the fact of the matter is that GDP is growing. We've avoided much of the slumps, bumps, and grinds that the world economy has hit, and probably even more importantly, we are in the seventh year of expansion, and the economic fundamentals are just fine. The reality is that as forecasterswe can tell you with pretty good odds what's going to happen over the next two years. However, to predict what’s going to happen in three years would lead to fuzzy assumptions, and predicting what will happen in four years is a total pipe dream. No forecaster has any idea of what’s going to happen in four years. But we can predict the next two years. Every two years I have the same conversation - nothing's going to happen. Why? Because the fundamentals are fine. There's no major amounts that have caused me any worry whatsoever about an impending recession. Now that has changed a bit because there are potential policy decisions that could upset the apple cart, but that's a different story.
As for American suffering, I like to point out that while the United States represents 5% of the global population, we also represent 20% of global consumption. Here's a fact that everyone should chew on: We are still the biggest group of spoiled brats on the planet. Just once I would like to hear presidential candidates stand up and point that out to us because that is the reality. We are by far the most profligate consumers on the planet. Real incomes have been rising, and well-being has been rising even faster. Labor markets are healthy - there are no legions of dispossessed workers roaming the Midwest. That’s a figment of our imagination. Labor markets are tight right now, and they continue toget tighter by the minute with plenty of positive ramifications for the economy. Inflation is low and interest rates are still low. Business investment is very solid. Corporate profits still makeup an all-time high share of total U.S. economic income. When it comes to U.S. energy, the biggest problem that we have with our energy sector is that it is too successful for its own good. And unlike what the rhetoric would have you believe, manufacturing in the U.S. is alive and well. It is doing just fine, and its impact on net trade has been good for the economy. Yes, there's been some wins and loses, but its overall impact on net trade is good for the economy and for our fair state of California. This is the case even though California waspredicted a few years ago to be “the next Greece”and implode due to its own terrible set of taxes and regulations. It turns out that California is leading the economy right now and is driving the U.S. forward, not holding us back.
This doesn’t go to say that everything's fine. I'm not “Pollyannaish” - I understand that we’re facing many challenges. But the slow growth we're dealing with has a lot to do with the self-inflicted wounds of political gridlock.The global economy is weak partly because of the global commodity glut we've been working through. Additionally, state local budgets are stressed despite seven years of solid revenue growth, andwe have decaying infrastructure.You think that there’s problems for labor markets now? No, there's not. Wait until all cars and trucks are being driven by computers and not people. We have yet to see true problems in our labor market. Of course we have an underperforming housing market, we have underfunded pensions and entitlements, and we have growing wealth inequality.But the thing that scares me the most is the growing disconnect. There's always been a disconnect between politics and economic reality, but that disconnect has never appeared to be as intense as it is right now. That really does worry me more than anything else. We continue to have a vision of the U.S. economy that just isn't true.
To show where all of this optimism comes from, we must go through some of the statistics. Here's GDP growth, and they haven't done a year-on-year basis to remove some of the volatility. You can that it’s heated up and slowed down several times, but it reached 3% growth for a while until it started to slow down in 2016 yet again. This time the slowdown was caused largely by the global commodity glut, the slowdown of many commodity producing nations, and the slowdown of exports as a result of the fact that major business investment wrapped around those big oil producing states. We have continued to grow, and indeed, toward the end of the year the economy started heating up in the fourth quarter and grew by about a 2%year-on-year basis. What changed? Well, the global commodity glut gradually worked its way out of the system, exports began to pick up again, and mining activity in the U.S. started to pick up again as well. Some of the economies that were hit hard by the downturn are also moving forward again. Overall, the net result is thatwe are coming out of 2016 with strong economic momentum.
Take a look at how the ISM indices are both pointing up in the 50s range. Corporate profits are beginning to bounce back in the third quarter. These are all solid signs that the economy is yet again gathering speed. Yet one of the biggest pieces of good news out there is the fact that through all of these ups and downs, U.S. consumption has remained stable. As we known, consumer spending is two-thirds of the U.S. economy, and so as consumer spending goes up, the overall economy goes up as well. Consumption has been nice and steady over the last four or five years, and so consumers have been the source of our economic growth. Right now real spending is growing at about a 3% year-on-year basis and is therefore growing at a faster rate than the overall economy. The reason that people are spending more is because they're earning more, and that’s good news.But how do I know that this is happening? Well, take a look at how the personal savings rate still remains in that 5.5% to 6% stable rate. People are earning more and people are spending more. There are many more jobs now and we have a tight labor market, but you won’t hear people having this conversation. Instead, we continue to dwell on the idea that the American workforce is suffering.
If we take a look at the overall payroll, we see that employment is growing somewhere between 1.5% to 2% on a year-on-year basis. 2014 heated up, and we’re growing at a rate that’s a little below 2% right now and will probably slow down to about 1.5% by the end of this year. Nevertheless, keep in mind that the job openings rate is near an all-time high level right now, and the demand for labor has not slowed. In fact, it seems that it is the supply for labor that has slowed, which in turn is causing the rate of overall hiring to slow. What's happening to labor supply? Well, take a look at the unemployment rate. The headline number is running at about 4.5%. That’s very tight. Miserablists will immediately tell you that's the wrong unemployment rate. I always love these debates. What do you mean? Well miserablists will say that the unemployment rate doesn't include discouraged workers. But the truth is that we’ve got that information too, and it’s called the U-6. The U-6 includes underemployed and discouraged workers, and right now it’s running at about 9.5%. Yes, that too has been falling consistently over the last eight or nine years. We have a U-3, a U-4, a U-5, and a U-6. I don't think we have a U-2, I think that's a band, not a statistic, but no matter how you slice them, all of these numbers are correlated at .98. Thepeople saying that one of the measurements is right and the other ones are wrong are silly. All of the measurements are pointing the right direction, and all of them are pointing down.
Still, the miserablist always has a comeback. What about participation rates? I'm showing the participation rate that’s on the left-hand side in two different ways. The blue line is the overall participation rate for 16-64 year olds. The red line, on the other hand, is for what I call the core group, which includes those between ages 25-54. It is true that these numbers have been falling, but it’s important to keep in mind that they didn't start falling in 2008. In fact, they began to fall back in 1997, and they hit their peak in 1998 and then began to decline. Demographers back in 1995 predicted that this would happen. Additionally, it’s important to understand that the decline in participation rates is not being driven by a lack of job opportunities, but that it is instead the consequence of an aging workforce.The workforce right now consists of aging baby boomers that are moving into the last 10 to 15 years of theircareer, and so participation rates are naturally declining. About two-thirds of the decline that you're seeing here is driven by nothing more than these demographic changes, and about half of that is due to the fact that teenagers really don't work that much anymore. But yes,included in the overall decline are blue-collar males who have seen participation rates fall in ways that don’t seem to have much to do with any of these demographic changes. Nevertheless, that is a small portion of the numbers. It is a small portion of the conversation, not a large one, and it is certainly not enough to drive, shall we say, Trump to victory. The idea that there are legions of people out there that are dispossessed workers is a problem that does not exist. You can see this in other ways as well. For example,due to the fact that labor markets are tight, real median wage growth right now is running at about 3% on a yearly basis. This data comes directly from the Atlanta Fed and is used to deal with some of the problems in the underlying base data,but it's very clear that the numbers have been growing for the last couple of years -particularly those for labor force growth. One thing that clearly shows that the labor markets are tight is what happens when people start getting pulled back into them. That’s exactly what we're witnessing right now. Over the course of the last year, the growth in the labor force has been running at a1% to 1.5% growth rate. That's the best we've seen since 2005, and it’s a good number. In 2016, the number of people on Social Security Disability declined. Everything is pointing to the fact that our markets are tight, and it’s that simple.