Home   Logon   Mobile Site   Research and Commentary   About Us   Call 1.800.621.1675 or Email Us       Follow Us: 

Search by Ticker, Keyword or CUSIP       
 
 

Blog Home
   Brian Wesbury
Chief Economist
 
Click for Bio
Follow Brian on Twitter Follow Brian on LinkedIn View Videos on YouTube
   Bob Stein
Deputy Chief Economist
Click for Bio
Follow Bob on Twitter Follow Bob on LinkedIn View Videos on YouTube
 
  The Economic Surge
Posted Under: Bullish • Employment • GDP • Monday Morning Outlook

Paul Krugman, Larry Summers and Bob Gordon have some 'splainin to do.  Where's that "secular stagnation?" 

Since 2009, they, along with many others, have said the US economy is stuck at 2% real growth.  Their theory got traction after 2009, as the U.S. saw what we called a Plow Horse Economy.

But, we never believed slow growth was permanent.  The real problem was the size of government – too much spending, too much regulation and excessively high tax rates were holding the economy back.  We believed the idea of "secular stagnation" was another Keynesian red herring, designed to hide the damage government was doing and fool people into accepting slow growth as something that couldn't be fixed.

But after cutting tax rates and regulation, Friday's GDP report demolished their theory.  Real GDP grew at a 4.1% annual rate in the second quarter, and is up 2.8% in the past year.   And although some analysts pointed out that net exports were an unusually large boost in Q2, they ignored that inventories were an unusually large drag (the largest drop since late 2009).  As a result, our initial forecast for real GDP growth in Q3 is 4.5%, even faster than was just reported for Q2.
   
So now some of the same people who said the economy couldn't grow any faster are saying that the acceleration in growth is just temporary, due to tax cuts.  While we certainly agree that tax cuts boost growth, we think the change is more than temporary, particularly due to the cut in the corporate tax rate and the move to full expensing of plant and equipment.  Not only has real GDP growth picked up, "potential" GDP growth has accelerated, as well.

Potential growth is a term economists use to mean how fast the economy would grow if the unemployment rate remains steady.  We calculate it by using "Okun's Law," named after economist Arthur Okun, President Lyndon Johnson's chief economist.  Okun's Law says that for every 1% per year the economy grows faster than its potential rate, the jobless rate will drop by 0.5 points.      

Working backward from the unemployment rate declines of recent years shows that potential GDP growth has picked up.  From mid-2010 thru mid-2017, Okun's Law said potential real GDP grew at just a 0.6% annual rate.  But in the past year, potential GDP has risen to 2.0%, and signs suggest it's moving higher.      

Maybe this is a statistical fluke that will fade away over the coming years, but it sure looks like something changed a year ago. Deregulation and tax cuts are boosting growth, and the Keynesians are back to the drawing board.

Brian S. Wesbury - Chief Economist
Robert Stein, CFA – Deputy Chief Economist

Click here for PDF version

Posted on Monday, July 30, 2018 @ 11:41 AM • Post Link Share: 
Print this post Printer Friendly

These posts were prepared by First Trust Advisors L. P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
 
The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA and the Internal Revenue Code. First Trust has no knowledge of and has not been provided any information regarding any investor. Financial advisors must determine whether particular investments are appropriate for their clients. First Trust believes the financial advisor is a fiduciary, is capable of evaluating investment risks independently and is responsible for exercising independent judgment with respect to its retirement plan clients.
First Trust Portfolios L.P.  Member SIPC and FINRA.
First Trust Advisors L.P.
Home |  Important Legal Information |  Privacy Policy |  Business Continuity Plan |  FINRA BrokerCheck
Copyright © 2018 All rights reserved.