Commentary: U.S. Economy remains strong, but headwinds are emerging
By Algenon Cash
The Labor Department released the February jobs report this past Friday and needlessly to say, it was less than stellar – with only 20,000 jobs created, it was the weakest performance since September 2017. The weather-sensitive construction industry, along with the embattled retail sector, was mostly responsible for the paltry employment gains. Undoubtedly, the announcement renewed predictions that an economic slowdown is definitely on the horizon.
Considering the previous two months both posted healthy job gains, it’s likely the most recent jobs report understates the overall health of the labor market. Other details in the overall economy give many of us a sense of optimism.
For example, the labor participation rate has risen to 63.2 percent, annual wage growth is 3.4 percent, unemployment is below 4 percent, and consumer confidence rebounded significantly in February. All these important metrics point to a healthy economy.
Economic growth accelerated in 2018 because of Trump’s debt-funded tax cuts. However, economic growth in Q1 was around 1 percent, far below the administration’s stated target of 3 percent. Not to mention the $1.5 trillion stimulus provided from the GOP tax cuts appears to be losing steam, but unfortunately causing the federal budget deficit to reach nearly $1 trillion – the largest number since the ‘Great Recession.’
Trump’s tax cuts boosted the appetite for foreign goods and combined with tariffs imposed last year on foreign steel, aluminum, and Chinese products, pushed the trade imbalance to a decade-long high of $621 billion. The deficit with China widened to an all-time record of $419.2 billion. Of course, these numbers contrast significantly with Trump’s promise to “Make America Great Again” through resurgence in manufacturing jobs.
Despite Trump’s success with renegotiating the North American Free Trade Agreement, also known as NAFTA, the trade imbalance with Mexico still reached a new peak of $81.5 billion – the United States maintained a surplus in 2017 with South and Central America.
The primary beneficiary from the GOP tax cuts was large corporations, but the deficit and debt hangover will mostly be felt by individual taxpayers. Treasury yields remain historically low, which eases government borrowing; however, when yields do increase, then it will certainly disrupt the federal budget as higher interest costs push out available capital for healthcare spending, education, defense, and multiple other critical areas.
The current national debt is hovering around $21.97 trillion – a mind-blowing number when you consider it equates to 76.4 percent of the nation’s GDP. Candidate Trump promised to eliminate the $19 trillion national debt in 8 years, but President Trump is going in the opposite direction. More government debt places the current or an incoming administration in a tight spot where the available tools to jumpstart a slowing economy are no longer available.
The administration just released their latest budget, which acknowledges the federal deficit will double from their 2017 projection of $488 billion to over $1 trillion in 2019 and 2020. The U.S. has only run a deficit of $1 trillion or greater four times – during the Obama era ‘2009-2012’ – but that was after the catastrophic effect of the financial crisis in 2008.
Trump’s deficit predictions don’t improve until 2029, when the annual deficit drops to $202 billion, but the forward-looking picture still falls short of his campaign promise. The Congressional Budget Office disagrees with the administration with the expectation the deficit will not decline over time and by fiscal year 2029 it will hit $1.3 trillion.
Not to mention the administration assumes GDP growth will average 3 percent over the next decade, which is highly unlikely considering the economy has been expanding for the past decade.
June will mark ten straight years of U.S. economic growth, which is completely out of the ordinary. Recessions are an important necessity in a properly functioning economy. Downturns clean out underperforming assets, deleverages the economy, and routinely encourages healthy growth where capital flows to the best performing assets.
We are long overdue for a recession.
Algenon Cash is a nationally recognized speaker and the managing director of Wharton Gladden & Company, an investment banking firm. Reach him at acash@algenoncash.com.
