Fortune: The End is Near For the Economic Boom
Article by Geoff Colvin on Fortune Magazine
THE OPTIMISM IS BEAMING like the summer sun. America’s big-company CEOs are bursting with confidence. CFOs are just as ebullient. Leaders of small businesses are also brimming with optimism—more than at any time in the past 30 years, reports the National Federation of Independent Business. At least figuratively, confetti is flying and Champagne corks are popping across the length and breadth of American business.
It seems a shame to pull the plug on the dance music, so we won’t, exactly. It wouldn’t be surprising if the U.S. economy continued to grow impressively for at least a few quarters more. Unemployment is near historic lows, and better job prospects are drawing more workers back into the labor force. No wonder business leaders are confident.
Yet all these signs of economic strength mask fundamental realities that won’t fade away and mustn’t be ignored. The current economic expansion is much nearer its end than its beginning, as accumulating hints suggest—including the stagnating stock market, about which we’ll say more in a bit. Already the concerns are pushing up long-term interest rates, which is bad for asset values. Uncertainty about the effects of a trade war is causing many companies to postpone action, dampening potential investment. Indeed, look past those disco balls and you’ll see economic warning signs everywhere. A significant slowdown or even recession is coming sooner or later, and it’s probably coming sooner than you think. It always does.
A Seasonal Change is Coming
LET’S START WITH THE OBVIOUS: Economies follow cycles. The timing of the business cycle is never easy to predict. But at some point, economic activity reaches a temporal peak, then begins to contract until eventually it bottoms out and starts growing once more. A familiar sign that we’re in the waning stage of the growing season, ironically, is that the economy overheats—think of it as an Indian summer: Companies push factories to produce more than their long-term sustainable output, pushing employees to work more overtime. Demand is so strong that inflation starts to increase, leading central bankers to raise interest rates, which causes asset values, including stock prices, to level off or fall. Ray Dalio, CEO of the world’s largest hedge fund, Bridgewater Associates, writes, “That is why it is not unusual to see strong economies accompanied by falling stock and other asset prices.”
All of that is happening now. The Congressional Budget Office finds that this year, the economy has begun overheating in just this way, producing more than its sustainable longterm potential. The CBO predicted in May that as wages rose, more people who had left the labor force would come back to work, and, yes, that’s just what happened in June. The labor market continues to be tight, with workers so confident that they’re voluntarily quitting their jobs at the highest rate in 17 years. Meanwhile, employers will likely have to bid up wages in order to attract and keep good workers, hitting corporate earnings directly.
Inflation and interest rates are rising and will likely continue to do so, forecasts the CBO. With all those factors combining, says Dalio, “We know that we are in the ‘late-cycle’ part” of the business cycle.
It is somewhat remarkable, historically speaking, that it has taken this long to get here. America’s current expansion is 110 months old. The current growth run is the second longest in the 164 years for which the National Bureau of Economic Research has done the analysis; the average expansion has run a mere 39 months. The only one that outlasted this one lived to be 120 months old (1991–2001).
Old age isn’t by necessity a death knell for an expansion—but then, there is something that tends to accompany it: When things start to break down, they break down en masse.
ECONOMIC OUTPUT is pretty straightforward in concept: It’s a function of labor, capital, and productivity. The simple fact is, it’s hard for an economy to grow very fast if the labor force is growing very slowly, as the U.S. labor force is doing. In the 1970s, it increased at a 2.6% annual rate; now the rate is about 0.2%. One reason for this is that for many decades, Americans have been having fewer and fewer babies (the U.S. fertility rate dropped to a new all-time low last year). As the baby-boom generation continues to age and exit the workforce, the number of American-born workers will sharply decline. This past October, the Bureau of Labor Statistics projected that over the period of 2016 to 2026, there will be 11. 5 million jobs created and a million fewer people in the workforce to fill them.
To counter that demographic drag, American companies have relied on an influx of people from outside the country. Immigrants accounted for 17.1% of the U.S. workforce in 2017.
So far, America’s immigration crackdown has not significantly reduced net in-migration, but it’s a compounding risk that could have far-reaching consequences for American businesses large and small.
A Trade War Makes Other Problems Worse
BY ITSELF, the Trump administration’s immigration policies may not be enough to stop growth in its tracks. By the numbers, the trade-related skirmishes so far are insignificant in America’s $20 trillion-a-year economy. Yet the effects could easily mushroom, in two intertwined ways.
First, even the biggest wars typically start with minor battles that spark an unstoppable cycle of escalation. In the current trade war, that appears to be underway. As the stakes get higher, the rhetoric gets more bellicose. China is “threatening United States companies, workers, and farmers who have done nothing wrong,” Trump said in June. China’s Trade Ministry called the speech “blackmail.” When the latest tariffs took effect in July, a Chinese Communist Party newspaper warned that “Washington has obviously underestimated the giant force that the world’s opposition and China’s retaliation can produce.”
As public threats become more explicit, backing down from them appears ever less likely. That’s how a piddling spat between the world’s two largest economies, jointly the foundation of global economic growth, could become a historic trade war.
But the second way the current dispute could damage the U.S. economy doesn’t even require that hostilities get worse. It requires only that people become less certain about where all this is headed. That effect—an “uncertainty shock,” as Bank of America Merrill Lynch economist Michelle Meyer called it in a recent note—is happening already, and it worries the Fed.
No one can predict where a large-scale trade war would lead. The last one occurred in the 1930s. Uncertainty prompts paralysis—and that’s no good for growth.