Monday, September 5, 2016

Election calculations and the August jobs report

The August jobs report was disappointing, since it confirmed that the economy has downshifted from the 2 – 2 1/2 % annual rates of growth that prevailed from mid-2009 until earlier this year. With private sector jobs having increased at a 1.5% annualized rate over the past six months, and with productivity running around zero or less, the economy is on track to grow at a miserably slow 1 ½ % rate in what’s left of the year.

What might account for the downshift? Risk aversion—which has played a prominent role in the economy since the 2008 financial crisis—is certainly a factor, as is weak business investment. But more recently, I would argue, it’s due to businesses sizing up the prospects for policy in the coming years. There’s little or no incentive for anyone to take on extra risks right now. Let me explain why.

Hillary Clinton and Donald Trump are a study in contrasts. She wants to double-down on Obama’s policies—higher taxes, more regulation, and more income redistribution—despite those policies being the most likely culprits for the miserably slow growth of the past seven years. She believes that government can redirect the economy’s scarce resources and thereby create more jobs and growth in the process. Being a businessman, Trump understands that people and businesses respond to incentives. He proposes to slash corporate taxes and reduce regulatory burdens in order to incentivize job creation and make it easier to start and run a business. Clinton believes in the power of government—despite its many and manifest failures—while Trump believes in the power of market forces and free enterprise, which over the years and across many countries have proven to be the true engines of prosperity.

As a supply-sider, I’m with Trump (at least on fiscal policy—see "The election should be all about growth"), and I believe his policies would be much more likely to stimulate growth than Clinton’s policies. Importantly, I think the vast majority of business people would agree. (Except, of course, for those businesses that thrive on government handouts and crony capitalism.)

If you agree with me, then it should be easy to see what ails the economy these days.

Put yourself in the shoes of a corporate executive who this year is contemplating creating a new business or expanding an existing one. You figure that tax and regulatory burdens are unlikely to change for the better under a Clinton presidency, but they could improve significantly under a Trump presidency. Let’s stipulate that Hillary has a 65% chance of winning, and Trump a 35% chance. That means there is a 65% chance of things staying the same or getting worse (a lot depends on whether the Republicans retain control of Congress), and a 35% chance of some significant improvement—in particular a substantial increase in the after-tax rewards to working harder and taking on additional risk. A 15% business tax rate coupled with incentives for repatriating offshore profits (which Trump is proposing) could profoundly change the attractiveness of new investment. The odds favor no improvement, but should Trump win—which at this point is within the range of possibility—things could get a lot better starting sometime next year.

Would you move ahead today with a new investment, or would you prefer to sit back and wait to see what happens?

If it were me, I would wait. I can’t see conditions deteriorating significantly under a Hillary administration, since I believe that there is enough support in Washington for a reduction in corporate taxes to ensure that at the very least taxes don’t go up. But even if Hillary were to push through every one of her awful ideas, I’d be better off waiting, because if bad things were to happen, I could just pull the plug on that new project and end up doing nothing. On the other hand, if policies were to become more business-friendly next year, I could quickly decide to take the plunge and invest. Hope for the best, but prepare for the worst, as they say.

In short, there is no incentive for businesses to take on new, risky ventures this year, and every reason for businesses to wait until next year to decide. The uncertainties this year are enormous, and economic actors don’t like to make decisions in such a climate—it’s that simple. I think this explains why business investment has been weak and why jobs growth has slowed this year.

What follows are a few charts that illustrate the slowdown in jobs growth this year, and the very low level of productivity that has prevailed for several years:

The monthly change in private sector jobs (the only ones that really count) has averaged only 150K over the past six months.

That translates into an annualized change of 1.5%, down from a high of 2.6% two years ago.

Labor productivity has been miserably low for several years now, with no sign of improvement.

UPDATE: The charts below, updated for today's release of the August ISM service sector indices, also confirm the economy has downshifted this year. Business activity has softened and hiring plans have been scaled back.

Think about this another way: if you thought that income and capital gains taxes had a 35% chance of being cut meaningfully next year, but were very unlikely to rise, how eager would you be to sell a highly appreciated asset today? The rewards to waiting might be significant. Taxes matter.


Benjamin Cole said...

I agree with Scott Grannis!

I am a bit taken aback that the GOP establishment, nearly en masse, has put the knife in Trump's back.

My usual caveat is that I think tight money is also choking off economic growth, and thus investing and productivity.

I never thought anyone could make Al Gore look interesting, but Hillary Clinton manages to do so by comparison.

Trump might be a loose cannon however. He is one celebrity who needs his handlers....

mmanagedaccounts said...

It is both interesting and frustrating to read that Scott Grannis, a supply-sider, believes our sluggish 2% growth over these past 7 years is due to higher taxes, increased regulations and income redistribution, while Nobel-winning, chief economist at the Roosevelt Institute, JOSEPH STIGLITZ, believes the exact opposite. He agrees with Hillary. Stiglitz places all the blame for the "economic conditions" of the United States over the past 35 years on supply side economics. According to Stiglitz, not only is supply side economics to blame for U.S. economic woes, it is also to blame for sluggish growth globally. The left sees supply-side economics as a fiscal demon from hell that must be stamped out.

Really, those who oppose supply-side economics have ruled the day for decades, with brief exceptions. Their teachings are entrenched in most university economics departments, business schools and government agencies.

As Scott points out, Hillary Clinton will "double down" on President Obama's policies of higher taxation, more regulations and increased income redistribution. The only reason I can see for the GOP establishment putting the knife in Trump's back is his careless rhetoric and personal attacks against primary opponents, their refusal to hear that Trump is arguing for "fair trade," not no trade, and a halt to illegal immigration, not no immigration. They're listening to the liberal media twist.

The odds are against a Trump victory, but we will regret putting Hillary Clinton back in the White House where she can again rent out the Lincoln bedroom, and again leave office with the people's furniture and silverware. I worry that if she is elected we will move ever closer to Europe, and will have 4-8 more years of 1-2% GDP.

Rob said...

Scott what do you think if Gary Johnson ?

Frozen in the North said...

I'm sorry are you guys actually having s serious conversation about Donald Trump, really? This is a guy who started on third and thinks he's hit a homerun. Daddy gave him his first $200 million, and then he made it grow into something -- no one knows what exactly, since for the first time in nearly 60 years a presidential candidate will not release his income taxes (his right I guess).

Scott, I didn't understand your love of Ted Cruz -- you know its a sign when 100% of all your colleagues hate your guts! Trump is another matter entirely. You seem to be blindly support the Republican candidate, honestly, as an investors the last 8 years have been very very good, why screw around with something that works?

the 2000's were terrible years for investors -- Since 2008 its been amazing -- I just don't get it.

Scott Grannis said...

Frozen: The market has indeed done very well for the past seven years, but a good part of that is just a correction from an absolutely terrible decline in 2008 and early 2009. As I've documented over the years, the market is up not because the economy is growing by leaps and bounds (which it's not), but because the economy has proven to be not as bad as the market has been expecting. You seem to be ignoring the huge gap (which I estimate to be as big as $3 trillion) between the current size of the economy and the economy's potential size. I've traced that gap back to many years of bad policies (Bush gets a share of the blame). The economy is Ok, but it could be much, much better.

I don't like Trump as a person, but he has a far better grasp of what ails the economy than Hillary. I'm compelled to support him because I think his policies would do more good than harm to the economy, and that in turn could benefit the lives of many millions of the poor and middle class. And then of course there is the fact that Hillary is a congenital liar and the Clintons and their Foundation are arguably the most corrupt institution in the political history of the U.S.

ronrasch said...

Trump is the lesser of two weivl's who although a loose cannon has the potential to actually good things both politically, socially, and economically.

NormanB said...

For a compilation of employment info I suggest the Conference Board's Employment Trends Index (ETI) :

Further the lack of usefulness for the economy itself from the QE's is easily seen in Productivity. (The five year average is superior to the two year average for clarity of trend.) Whereas when this was declining from 1966 to 1982 the stock market was also declining which is how it should be. But now with QE there is the same decline in five year productivity but the stock market has flourished. This shows, I think, that QE hasn't done what it was in the end supposed to do, raise the real economy and living standards after it inflated asset prices in order to bring real growth around. QE has failed. What remains is the aftermath which I am at a loss to predict. Maybe you can.

steve said...

"Daddy gave him his first $200 million, and then he made it grow into something"

I just love how this number keeps growing and growing the closer the election comes...

Benjamin Cole said...

"The national CNN/ORC poll, released on Tuesday, found that 45% of likely voters support Trump, while 43% said they support Clinton (Trump’s 2-point lead is within the poll’s margin of error but still marks a shift from previous polls that showed Clinton significantly ahead). Libertarian Gary Johnson earned the support of 7% of likely voters, while Green Party candidate Jill Stein earned 2%."

I hope a very talented writer somewhere writes a book "The Making of the President 2016." This is one amazing election. (Oldies will remember Theodore White's series).

Trump, a political novice with 921 mistakes under his belt, his continuing lack of organization, his penchant for unnecessarily offending large voting blocks (like women), with the GOP Old Guard shunning him when not actively stabbing him in the back, is ahead in a "serious" national poll by 2%.

I say Trump is running against the Donk establishment...and the GOP establishment too.

And, as of now, he has a real shot at the Presidency.

Trump is the most jaw-dropping political animal in the postwar era, and maybe since…who? Teddy Roosevelt? Even he looks tame.

Pull up a chair friends, you all have a front-row seat at the most unusual political scene in decades and decades.

Scott Grannis said...

Indeed! This will be an election for the history books.

NormanB said...

The WSJ reports that 13% if the electorate are undecided. 45% favor a GOP Congress; 23%, a Dem one. If translated into Trump votes it would add a whopping 3% to his vote total.

Andrew said...

Speculation on potential actions by political candidates is a risky proposition. Would prefer to stick with more factual information.

Regarding the economy, perhaps part of the problem are overly restrictive standards for home mortgages. Don't wish to have a repeat of the recent past, but there are more ways to create jobs than by corporate investment or Gov't make work decisions. Credit standards have been tightened since 2007, perhaps they are too tight.

Scott Grannis said...

Re Gary Johnson: I've seen him a few times over the years and he's a good libertarian (as I am). But he has always struck me as something of a lightweight. I don't know how to put it any better than that—it's just a feeling that he does not come across as a commanding leader. Maybe it's just that he lacks gravitas. In any event, I don't think he has a prayer of winning.

Houston Advisor said...

If this election cycle doesn't point out how broken our electoral system is, nothing will.

1.) Gerrymandered districts (GOP House protection)
2.) No term limits
3.) Founders warned us about powerful political parties from the beginning
4.) A growing uneducated and uninformed electorate easily conned by hyper-partisan media outlets and unchecked comments/answers by the candidates
5.) Procedural process of US Senate
6.) Corporations are people nonsense

If we don't wake up and change (w/ constitutional amendments), we will be doomed to more candidates like the ones we have today.

Johnny Bee Dawg said...

Another 8 years of lawless Progressive government means another 8 years of risk aversion and GDP falling even further below trend. Another $2 trillion below?? How many Trillion can we afford to waste?
At the exact moment that we need more growth to dig our way out of entitlements and debt, we throttle the economy with more Progressive redistributive nitwittery, even higher tax rates on the most productive, and even more onerous regulations. Its like a sick joke.

Dept of Labor regs will fundamentally transform markets and drive trillions of assets into cookie cutter pie chart models which can be more easily controlled by government and central banks. Herd the masses and eventually convert their wealth into streams of payments.

Government healthcare, government drug pricing, government insurance, government lending, government investing, government consumer pricing, government media, government tracking of your movements and your communications, etc.
Government, government, government, government. GDP and productivity doesn't stand a chance with more of this.

8 years of Hillary aren't going to look good for prosperity unless you have donated to the Clinton Foundation or her campaign, or work for somebody who has.

And here's the Fed getting ready to raise rates, even though T-Bills haven't budged in 6 months. Markets don't like them forcing the issue. T-Bill yields have always gone up a few months ahead of past Fed rate hikes. The Fed has almost always been very good at waiting for the market to signal their acceptance of coming moves. Not this time, if you believe the Governors' rhetoric. And here comes another hastily put together speaking engagement on Monday from a confirmed Dove Governor. Will she flip?

And the public LIKES all this crap??
Maybe a little market smack will help people see how absurd all this Nanny State and foreign policy debacle really is.

Thank goodness for Bread & Circuses.
I hope our government planners will allow us to keep college football and BBQ after Fundamental Transformation.

Scott Grannis said...

JBD: Can't argue with most of what you say. I'd only add that this time—if the Fed does indeed raise rates soon—the Fed tightening cycle will be very different from past cycles. This one will be a first, and its consequences are difficult to foresee. Why? Because in past tightening cycles the Fed drained scarce reserves from the banking system in order to force the Fed funds rate higher. Draining reserves back then created an effective shortage of money—and liquidity—in the banking system. This time the Fed will raise short rates by decree: they will simply stipulate that reserves will now pay a higher rate of interest. The banking system will still be very flush with excess reserves. Very flush. So maybe this time we won't have a liquidity crisis on top of a shortage of money. We will only have higher interest rates, which for some will be painful but for others rewarding.

It's going to be very interesting, to say the least.

honestcreditguy said...

Andrew, are you joking, credit standards are loose....Exotic products are back in the mix and you can get money from the govt. via an FHA loan with a 580 fico...

The problem is house prices, they are overpriced by 30-40% as we speak....the feds illegal granting of PE, Hedge and offshore PE to buy bulk foreclosures has created Pottersvilles!

I pray for a deep correction for the good of all people just not the well connected specs of banker buddies..

The fed fixed the housing market, just like everything in the world used as a trading vehicle has been. Blame the rotten pigmen whom feast on the poor and middle class. Pull up M2 money velocity and see what the Fed Scum and wall street have done to the middle class since's the tell

Benjamin Cole said...

Speaking of the Fed, Rosengren's comments have not been well-taken.

The Boston Fed President said he is worried about the US economy overheating.

Rosengren had a "wild party" at his house on Saturday, and they served tea, and two type of crumpets (!), and played charades until late at night, into the double digits. Some folks did not get out of front door in time to see the 11 o'clock news at home.