David Vomund
Large company CEOs are more optimistic about the economy than investors, thanks in part to the prospect of tax cuts.
In a recent survey, the CEOs were more optimistic for economic growth than they’ve been since 2014. Still, they expect gross domestic product (GDP) growth of just 2 percent in 2017, in part because whatever tax cuts come along later in the year won’t have much effect until 2018.
The International Monetary Fund has tempered its expectations. The IMF expects GDP growth of 2.3 percent this year and 2.5 percent in 2018. Why so modest?
In the simplest terms, GDP growth is the sum of productivity gains and a growing labor force. For the last decade, productivity grew at 1 percent annually, about half the pace of prior decades.
One reason is that we have increasingly become a service economy, and a productivity boost is harder to achieve than it is in manufacturing plants using more robots or at automated fast-food restaurants.
The labor force is not even growing at one percent because so many Baby Boomers are retiring, and the participation rate is at a low level last seen in the 1970s.
Add it all up and GDP growth will grow at well below 3 percent, which used to be a low bar easily and often met or exceeded; now it’s a high one last reached in 2006. So while politicians talk about increasing GDP growth to a sustainable 3 percent, words alone won’t do it.
What avenue would work? Corporate tax reform should encourage money held overseas to be brought back home to fund capital investment and other uses. Given our low fertility rate, immigration is the answer to population growth.
Lucky for us, so many people around the world would rather be here than there, wherever that is. None are lining up at the embassies of Venezuela, Cuba, or Russia to apply for immigrant status and visas. No wonder. But we need to welcome immigrants.
Whether the economy will turn strong or muddle along will become clear in time. In the meantime, profit growth will continue to exceed nominal GDP growth (4-5 percent). Interest rates will rise, though not by much.
Such an environment bodes well for stock investors even after the market’s long run. Bull markets don’t die of old age. They die ahead of a recession, one caused by excesses we do not see today. In short, the bull market is not ending anytime soon.
David Vomund is an Incline Village-based, fee-only money manager. Information is found at www.VomundInvestments.com or calling 775-832-8555.
