The Outlook for the U.S. Economy and the Policies of the New President
Jason Furman
Senior Fellow, PIIE
Peterson Institute for International Economics | 1750 Massachusetts Ave., NW | Washington, DC 20036
SNS/SHOF Finance Panel Stockholm
June 12, 2017
Outline
1. The short-run outlook
2. The prospects for long-run growth
3. The challenges of inequality and labor force participation
4. President Trump’s policy agenda
Measures of Labor Underutilization Have Recovered
Note: Dashed lines indicate averages from December 2001 to December 2007. Shading denotes recession.
Source: Bureau of Labor Statistics, Current Population Survey; author’s calculations.
Unemployment Rate
Discouraged and Other Marginally Attached
Involuntary Part-Time U-6
(Underemployment) Rate
0 2 4 6 8 10 12 14 16 18
2000 2003 2006 2009 2012 2015
Alternative Measures of Labor Underutilization
Percent
May -17
The Quits Rate is Above Its Pre-Recession Average, While Openings Are Tied for A Record
High
Note: Dashed lines indicate averages from December 2001 to December 2007. Shading denotes recession.
Source: Bureau of Labor Statistics, Job Openings and Labor Turnover Survey; author’s calculations.
Quits Rate
Job Openings Rate
Apr-17
1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5
2001 2003 2005 2007 2009 2011 2013 2015 2017
Quits and Job Openings Rates
Percent of Total Nonfarm Employment
Pre-Recession
Average
Inflation Has Generally Been Below the Federal Reserve’s 2-Percent Target
Note: Shading denotes recession.
Source: Bureau of Economic Analysis, National Income and Product Accounts; Federal Reserve; author’s calculations.
PCE
Core PCE
Apr-17
-2 -1 0 1 2 3 4 5
2000 2002 2004 2006 2008 2010 2012 2014 2016
Personal Consumption Expenditures Price Inflation
Twelve-Month Percent Change
Federal Reserve
Target
Compensation Growth Has Been More Mixed…
Note: Shading denotes recession.
Source: Goldman Sachs; author's calculations.
2017:Q1
0 1 2 3 4 5 6
2000 2002 2004 2006 2008 2010 2012 2014 2016
Goldman Sachs Wage Tracker (Nominal)
Four Quarter Percent Change
…But Real Compensation About What Would Be Expected in a Low Productivity World
Note: Shading denotes recession. Compensation adjusted for inflation using the CPI-U price index.
Source: Goldman Sachs; Bureau of Labor Statistics; author's calculations.
2017:Q1
Average 2001 Cycle
Average:
2007 Cycle
Average:
2001 Cycle
Average:
2007 Cycle -3
-2 -1 0 1 2 3 4 5 6 7
2000 2002 2004 2006 2008 2010 2012 2014 2016
Productivity Growth and Goldman Sachs Wage Tracker (Real)
Four Quarter Percent Change Nonfarm Business Productivity
Wage
Tracker
Gaps Have Closed In the United States
Source: International Monetary Fund, World Economic Outlook.
United States
-4 -3 -2 -1 0 1
2010 2011 2012 2013 2014 2015 2016 2017
Output Gap
Percent of Potential GDP
2017
Going Forward Growth Will Primarily Come from Potential
Note: Potential GDP growth is the intercept of an Okun’s law regression using four-quarter changes in real GDP and the employment-population ratio from 2007:Q1 to 2016:Q4.
All growth rates are Q4/Q4 for the year shown.
Source: Bureau of Economic Analysis, National Income and Product Accounts; Bureau of Labor Statistics, Current Population Survey; author’s calculations.
-1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5
2013 2014 2015 2016
Cyclical Potential
Real GDP Growth: Actual vs. Potential
Percent
Measures of Optimism Have Remained Strong Even While Financial Markets Appear to No Longer
Be Expecting Stimulus
Source: Conference Board; National Federation of Independent Business; National Association of Home Builders; Business Roundtable; Board of Governors of the Federal Reserve System; author’s calculations.
10-year Treasury Yield (Left
Axis) Trade-
Weighted U.S. Dollar (Right Axis)
Jun-17
110 115 120 125 130
0.0 0.5 1.0 1.5 2.0 2.5 3.0
Jan 2016 Apr 2016 Jul 2016 Oct 2016 Jan 2017 Apr 2017
Government Bond Yields and Exchange Rates
Percent Index, Jan 1997 = 100
U.S. Election Consumer
Confidence
May-17
Small Business Optimism
Housing Market Index Business Roundtable
CEO Economic Outlook
0 20 40 60 80 100 120 140
Jan 2016 Apr 2016 Jul 2016 Oct 2016 Jan 2017 Apr 2017
Consumer and Business Confidence
Index
U.S. Election
The Demographic Headwind to Future Growth
-0.5 0.0 0.5 1.0 1.5 2.0 2.5
1955 1965 1975 1985 1995 2005 2015 2025
Prime-Age (25-54) Population Growth, 1955-2026
Percent Change, Annual Rate (Ten-Year Trailing Average)
Source: Social Security Administration; author’s calculations.
The Worldwide Productivity Slowdown is Not Helping, Either
Source: Conference Board, Total Economy Database; author’s calculations.
-0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0
United States
Japan Canada Germany France United Kingdom
Italy 1996-2006 2006-2016
Labor Productivity Growth, G-7 Countries
Percent, Annual Rate
The Base Case for Potential Growth
No. of Years: 54 10
History Forecast 1953 to 2007 2016 to 2026
Population 1.4 0.8
Potential labor force participation rate 0.2 -0.4
Potential real output per hour (productivity) 2.1 1.7
Other -0.5 -0.3
Potential real GDP 3.3 1.8
CBO: Selected Components of Potential Real GDP Growth, 1953-2026 Growth Rate, Percentage
Points at Annual Rate Component
Source: Congressional Budget Office; author’s calculations.
Alternative Scenarios For U.S. Potential Growth
5 th Percentile:
0.7% 95 th Percentile:
3.0%
Median: 1.8%
Source: Bureau of Labor Statistics; Congressional Budget Office; author’s calculations.
Top 1% Share Has Risen Further and Faster in the United States
Source: World Wealth and Income Database; author's calculations.
2015
0 4 8 12 16 20 24 28
1975 1980 1985 1990 1995 2000 2005 2010 2015
Canada France
Germany Italy
Japan Sweden
United Kingdom United States
Share of Income Earned by Top 1 Percent, 1975-2015
Percent
Taxes and Transfers Have Played a Bigger Role In Reducing Top 1% Inequality in the United States…
Source: Congressional Budget Office (2016); CEA calculations.
Inequality Compounded by Continued Decline in Labor Force Participation for Prime Age Workers
Source: Bureau of Labor Statistics, Current Population Survey; author’s calculations.
May -17
1948-2007 Trend
86 88 90 92 94 96 98 100
1950 1960 1970 1980 1990 2000 2010
Prime-Age Male Labor Force Participation Rate
Percent
1948-2007 Trend
May -17
2000-2007 Trend
30 40 50 60 70 80 90 100
1950 1960 1970 1980 1990 2000 2010
Prime-Age Female Labor Force Participation Rate
Percent
The Decline Has Been Larger than Almost Any Other OECD Country
Source: Organisation for Economic Co-operation and Development; author’s calculations
Change in Labor Force Participation Rates Across the OECD, 1990-2015
-8 -6 -4 -2 0 2 4
Italy United States Estonia Turkey Denmark Korea Finland Norway France United Kingdom Australia Belgium Portugal Canada Japan Ireland Israel Spain Sweden Netherlands Greece New Zealand Luxembourg Germany
Prime-Age Male
Percentage Point Change
-10 0 10 20 30 40
Estonia Denmark Finland Sweden United States Turkey Norway Canada United Kingdom Australia New Zealand France Japan Korea Italy Israel Portugal Germany Belgium Netherlands Greece Ireland Luxembourg Spain
Prime-Age Female
Percentage Point Change
Putting the United States Toward the Bottom of the OECD in Prime Age Labor Force Participation
Source: Organisation for Economic Co-operation and Development.
Labor Force Participation Rates Across the OECD, 2015
0 20 40 60 80 100
Turkey Korea Italy Ireland United States Japan Australia Greece Israel New Zealand United Kingdom Belgium Latvia Luxembourg Canada Spain Netherlands Germany Estonia France Denmark Finland Norway Poland Slovak Republic Portugal Slovenia Austria Hungary Chile Sweden Mexico Iceland Czech Republic Switzerland
Prime-Age Female
Percent
0 20 40 60 80 100
Israel Italy United States Norway Finland Ireland Belgium Australia Turkey Poland Latvia Denmark Canada Korea Austria Portugal United Kingdom Chile Hungary Netherlands New Zealand Estonia France Germany Spain Slovenia Greece Sweden Slovak Republic Iceland Luxembourg Mexico Czech Republic Japan Switzerland
Prime-Age Male
Percent
Slower Productivity, Rising Inequality, and Declining Participation Have Combined to Slow
Median Income Growth
Source: Census Bureau; author's calculations.
25,000 50,000 100,000
1948 1958 1968 1978 1988 1998 2008
Real Median Family Income, 1948-2015
2015 Dollars (Log Scale) 1948-1973:
3.0%/yr
1973-2015:
0.4%/yr
The Policy Agenda
1. Fiscal Policy
a) Tax Policy b) Infrastructure
c) Other fiscal changes d) Fiscal trajectory
2. Regulation 3. Immigration 4. Trade
5. International Cooperation
Tax Policy
Tax cuts or tax reform?
Tax Policy
Current Law President’s
Principles House Republicans
Corporate Rate 35% 15% 20%
Expensing / No
interest Deduction
Border Adjustment
Top Individual Rate 39.6% 35% 33%
Broader Base Some More
Cost ~$5.5 trillion Goal is $0
Share Top 1% ~33%+ 99%
Deficit-Increasing Tax Cuts Could Hurt Long-Run Growth
Note: Based on medium elasticities scenario.
Source: Nunns et al. (2016); author's calculations.
2040
-8 -6 -4 -2 0 2
2015 2020 2025 2030 2035 2040
Change in Real GDP Under Trump Campaign Tax Plan
Percent Change from Baseline
Infrastructure Proposal: Short-run Increases Followed By Long-term Reductions
Source: Office of Management and Budget (2017).
2027
-30 -20 -10 0 10 20 30 40 50
President's FY 2018 Budget: Change in Infrastructure Spending Relative to Baseline by Fiscal Year
Billions of Dollars
Other Budget Policies
• 8 percent increase in defense spending in FY 2018
• 13 percent decrease in non-defense spending in FY 2018
– 11 percent cut in National Science Foundation
– 22 percent cut to the National Institutes of Health, including 19 percent cut for cancer research
– 23 percent cut in financial aid for college
– 34 percent cut to training and employment programs
• $2.5 trillion decrease to low- and moderate-income programs over ten years, 15 percent reduction
• Repeal/replace of the Affordable Care Act—including
health reductions to pay for high-income tax cuts
Overall Fiscal Outlook Under Current Law and the President’s Policies
Source: Congressional Budget Office; Office of Management and Budget; Tax Policy Center; Committee for a Responsible Federal Budget; author's calculations.
CBO Baseline
CBO Baseline + President's FY 2018
Budget
CBO Baseline + President's FY 2018 Budget + President's Tax Plan
FY 2027
0 1 2 3 4 5 6
2017 2019 2021 2023 2025 2027
Federal Deficit as a Percent of GDP, FY 2017 - FY 2027
Percent of GDP
Regulation
• The Trump Administration has expressed interest in reducing regulation across a number of sectors: e.g.
banking, health care, energy markets, labor markets
• Effects of deregulation on growth are likely to be small
– One estimate is that full repeal of Dodd-Frank would add 0.06 p.p. to annual growth rate (Holtz-Eakin 2015)—effects of
partial repeal are smaller
• Growth effects of deregulation also limited because of less control over State and local regulation
• In most likely case, deregulation could add at most 0.1
p.p. to growth rate
Immigration
• Restrictions on legal immigration and increased
uncertainty for unauthorized immigrants would harm growth:
– RAISE Act (Sens. Cotton and Purdue) would cut legal immigration in half after a decade
– Implies reduction in annual growth rate of 0.2 p.p.
over next decade
President Trump Has Not Followed Through on Campaign Promises for a 45% Tariff on China and
a 35% Tariff on Mexico…
Source: Census Bureau; Bureau of Economic Analysis; author’s calculations.
0 5 10 15 20
1929 1939 1949 1959 1969 1979 1989 1999 2009 2019
Effective Import Tariff Rate
Percent
With 45% Tariff on Imports from China and 35%
Tariff on Imports
from Mexico
…But There Has Been a Significant Increase in Import Restrictions in the First 100 Days
Source: World Bank TTB database; ComTrade (WITS); Chad Bown (2017).
Total China
Non-China
2017
0 2 4 6 8 10 12 14
1995 2000 2005 2010 2015 2020
Share of U.S. Imports Covered by Barriers Imposed under Trade Laws, Including Projection for
Trump’s First "100 Days"
Percent
Trump Effect?
Projected coverage of
"100 days"
actions
Change in U.S. Multilateral Role
Source: openclipart.org.
In Conclusion
• U.S. economy at/near full employment. Wage growth is lower than desired largely because of slow productivity growth.
• The outlook is for growth ~2%. This assumes
unfavorable demography continues and productivity bounces back somewhat.
• Inequality and labor force participation compound low productivity growth, leading to slow income growth.
• President Trump’s policy agenda could hurt growth
further—and promote greater inequality of incomes.
The Outlook for the U.S. Economy and the Policies of the New President
Jason Furman
Senior Fellow, PIIE
Peterson Institute for International Economics | 1750 Massachusetts Ave., NW | Washington, DC 20036
