“Give me a one-handed economist! All my economists say, ‘On the one hand . . . On the other.’ ”
— President Harry S. Truman
What’s ahead for the American economy?
That question is dividing experts, given that the economy has advanced at a slow pace since last winter even as the job market has recorded impressive gains.
Well, we have some one-handed economists.
On the one hand, Michael Gapen, chief United States economist at Barclays, sees growth picking up smartly in the third and fourth quarter, powered by a still-strong consumer and fading headwinds for the business sector. Indeed, he believes the Federal Reserve might well raise interest rates when policy makers meet next month.
On the other hand, Stephanie Pomboy, founder of MacroMavens, an independent economics consulting firm, thinks the optimists on Wall Street are in for another round of disappointment, with the economy once again failing to deliver a much-promised, but so far elusive, acceleration.
With the Labor Department scheduled to release the latest monthly jobs report on Friday, we talked with them last week about why they see things so differently.
Why, fundamentally, has growth been so slow lately?
Ms. Pomboy: After the bursting of the housing bubble and the Great Recession, there has been a generational shift away from spending toward saving among consumers. The great consumer credit boom of the 1980s, 1990s and 2000s is over. The savings rate has moved higher and this new impulse to save leads to a sluggish pace for growth. Plus, other expenses are rising for consumers, like health care and health insurance.
Mr. Gapen: I don’t agree with the idea that the U.S. consumer isn’t healthy. In fact, the weakness over the past year hasn’t been from households — it’s been in manufacturing, in industrial businesses and in the energy and export sectors. Wage growth is firming too. We’ve had modest and unspectacular growth, but it’s a mistake to assume slow growth is fragile growth. Given the succession of European debt crises, the sequester and fiscal cliff showdowns in the U.S., Brexit and China also slowing down, I’d say the American economy has been pretty resilient.
So what do you see for the second half of 2016?
Ms. Pomboy: I don’t think there will be a second-half rebound. Growth will be the same as in the first half of the year, or even weaker. We have a monster overhang from inventories, and consumer spending will continue to disappoint. I’m not saying they will fall out of bed. I just see the status quo — a sideways to downward churn, with a squeeze on discretionary spending. People will cut back further in discretionary spending with the huge increase in premiums for health insurance coming later this year and next year.
Mr. Gapen: I see growth of at least 2 percent or better, maybe up to the 2.5 percent range. The labor markets have sent a reassuring signal, and the industrial side of the economy is stabilizing, so that represents less of a headwind than we’ve seen in recent quarters. If consumers were worried about their income and employment prospects, they wouldn’t be buying cars or homes the way they have been. That suggests things are O.K.
When do you expect the Federal Reserve to raise interest rates? Should it even be considering a rate increase?
Ms. Pomboy: They should never have raised rates in the first place last December, but I wouldn’t put it past them to make another mistake next month. They’re playing a dangerous game of guiding financial markets and jawboning participants, but my economic forecast in no way justifies another raise in rates. If you look at the numbers for retail sales, for labor market participation, for inflation, there’s no reason for monetary policy to tighten now. And looking forward, the No. 1 input to employment growth — profits — has been declining for five quarters. That suggests we would be lucky to see job growth of more than 100,000 per month going forward.
Mr. Gapen: The Fed is signaling that the rebound in labor markets is real and they are ready to do one more hike by the end of the year. Whether that means September or December is up for debate. September is our call, but that’s on the assumption we see hiring going up by at least 200,000 in August. If we get a strong jobs number for this month, the Fed should move and we think they will.
Given your split in views, and the broader questions about growth, what does that mean for the stock market?
Ms. Pomboy: I come back to corporate profits. People are willing to dismiss quarter after quarter of disappointing economic data and downward revisions, but a moment of truth is coming for the stock market. I have to confess this is one area I’ve missed in terms of the stock market continuing to rise this year. But given how far asset prices are extended, I think we could easily see a 20 percent move to the downside. You wanted a bear, you got a bear.
Mr. Gapen: Corporate profits are a legitimate issue — but the weakness has been concentrated in manufacturing, energy and industrials. Other areas, like technology and health care, have fared better. There is a risk out there that the market is still too optimistic, but Barclays’s view is that equities will move sideways for the time being.
Longer term, what is your view? Is the economy condemned to slow growth in the years, even decades ahead?
Ms. Pomboy: I believe we are in a permanent era of low growth. The consumer is inclined to save and we have an aging population that is being forced to consume health care that is rising at double-digit rates. Against this backdrop, the Fed is impotent. However, they can’t admit that, so they will do more of the same — to no avail.
Since policy makers can’t abide that slow growth, the onus will shift to the fiscal side and political leadership. Reducing the corporate tax rate, reducing the regulatory burden on companies and changing the tax code to incentivize corporations to hire and expand, rather than pay dividends and buy back stock, would certainly help growth in the long term.
Mr. Gapen: I think the best we can do is 2 to 2.5 percent annually in the long run. Productivity growth is slow here, the rest of the world is growing more slowly and there is a lot of excess capacity out there, especially in China. In terms of economic output, America is the best apple in a bad bunch.
That said, there’s a case to be made that more investment in education, more emphasis on retraining and retooling American workers, and more infrastructure spending would help. There are things that can be done and a well-calibrated public-sector investment plan would pay dividends in the long term.