The Potential of a Roaring Twenties
Last week we discussed optimistic economic growth forecasts for 2021, highlighted by a Goldman Sachs projection of 8% growth, which would be the highest US economic growth rate since 1951. But even more critically, there are reasons to believe that longer-term growth prospects may be brighter than they have been in recent decades. While nothing is guaranteed, it does appear that some longer-term economic headwinds may be winding down, with additional tailwinds forming to give growth a push.
Neil Irwin lays out the case for economic optimism in some detail at https://www.nytimes.com/2021/03/13/upshot/economy-optimism-boom.html. The maturation of the global economy, combined with the fruits of technological innovation and expansionary fiscal and monetary policy, may combine to produce more benevolent economic conditions than we have seen for some time.
The globalization of the economy over the past twenty years, while good for long-term global growth, brought a great deal of disruption to the US economy. Cheap labor from China, India, and Mexico, while enabling lower prices for consumer goods, hurt many US firms and workers in the short run, particularly in manufacturing. The expansion of the internet and communication services enabled increased outsourcing of US jobs. However, much of the pain from these global transitions have passed—and with a rapidly expanding middle class in emerging markets, cheap labor simply isn’t as cheap as it used to be.
Technological innovation also stands potentially ready to improve life and the US economy. In recent years we have appreciated the Peter Thiel joke that “we wanted flying cars, instead we got 140 characters.” But there’s often a significant lag between the initial promise of technology and its realization. Back in the 1980s the Solow paradox espoused the idea that the computer age could be seen everywhere but in the productivity statistics. It took another decade before productivity ramped up.
Cheap batteries and driverless car technology look to be poised to revolutionize the transportation sector. Plunging solar energy prices will have an increasing impact on the energy sector. The flexibility offered by remote work and zoom meetings can still be utilized even in a post-pandemic world. And the mRNA technology that brought us COVID vaccines may have many more applications across health care.
Finally, fiscal and monetary policy makers have largely shrugged off inflation and debt fears, and have been fully invested in taking advantage of low interest rates to spur economic recovery and growth. President Trump appointed Jerome Powell to chair the Fed, and pulled his party away from austerity politics. President Biden has shifted his party away from deficit concerns and towards economic expansion. Jerome Powell has overseen a shift in the Fed’s philosophy from preemptively hiking interest rates to forestall incipient inflation, to giving the economy more slack to run, in case the natural rate of unemployment is lower than what Fed models had previously suggested.
In a way that would have been nearly unthinkable a decade ago, economics has been taking a hiatus from its role as the “dismal science.” And it’s still possible that the 2020s US economy will be disappointing—for example, high US infrastructure costs may limit our ability to take advantage of technological breakthroughs—and we believe that the case Irwin outlines is close to a best case scenario. But for now, there are reasons to think the economy is currently better positioned that it generally has been over the past two decades.
JMS Capital Group Wealth Services LLC
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This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument or investment strategy. This material has been prepared for informational purposes only, and is not intended to be or interpreted as a recommendation. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice.