Major economic themes this year have centered on continued and robust economic growth, the fiscal stimulus via tax cuts, the possible “new order” implicit in trade protectionism, and questions about the timing of the next downturn. Times are good, but people sense a shift might occur before long.
The U.S. economy is performing at high levels currently, no question. Jobs are the key to a good economy, and our national unemployment rate of 3.9 percent is the lowest since 1969. Income and consumer confidence are high, and gains over the past year have come across socio-economic groups.
The chasm in income is still high, compared with other developed nations, as the top 1 percent of Americans make 26 times what the bottom 99 percent get. But even that 99 percent have benefited from the strong economy, especially over the past year. And growth begets more growth. People with higher incomes spend more money, and that has kept business orders high.
Most other developed nations also are expanding their economies, albeit not as robustly as the U.S. in most cases. Still, our major trading partners are doing well, and that means some sustained demand for U.S. goods as evidenced by the resurgence in U.S. manufacturing.
Indeed, the U.S. economy is performing high enough to be at risk of “overheating,” meaning prices might increase a bit too much due to wage-push inflation (thanks to the low unemployment rate) and high consumer expenditures (thanks to those income gains). Tariffs undoubtedly will exacerbate the high prices, though trade experts differ on the exact impact.
I am watching this carefully. The last time we had a “trade war” was during the Great Depression about 90 years ago. Global trade was a fraction of what it is today, and it still intensified the global downturn. We now have more goods crossing borders, but the effect on the supply chain often is underestimated. Parts for finished goods come from all over the world. The price impact of these intermediary goods on the finished products is so complex that it is admittedly hard to measure. Ask just about any business owner, however, and they will tell you that not all of their parts are U.S.-made. The same is true for most goods produced abroad. They often have U.S. parts that are part of the complex supply chain and therefore vulnerable to tariffs.
Another important consideration in the prospect of overheating is the effect of the tax cuts. Those cuts, implemented last January, have had a major positive impact on small business confidence and expenditures. That’s the main reason second-quarter growth rates were so high.
Yet the tax cuts have a downside. The U.S. corporate tax rate needed revision, but federal taxes paid by U.S. companies have fallen 33 percent over the past year, and we will amass $100 billion more a year in deficits. Typically, tax cuts are implemented to bolster an anemic economy, and we accept some hopefully short-term increases to the deficit. But that’s not where we are now. We’re trying to avoid overheating. Less government spending might appear to be a way out, but our aging population (Medicare) and other payments are baked into future expenditures. They would be hard to extradite from the U.S. budget and the national psyche.
It is notoriously difficult to put all these factors into account to predict the timing and severity of the next downturn. I believe it is important to separate the cyclical factors, such as the unemployment rate, inflation and interest rate manipulations, from the structural factors, such as the ever-growing debt, aging population, skills gap, terms of global trade and onerous health-care and education costs. Business cycles will come and go, while we hope manipulations by the Federal Reserve will help smooth out peaks and valleys.
Nationally and locally, I focus on the structural issues that affect the sustainability of our growth. Locally, we seem to be paying more attention to structural issues such as the readiness of our workforce and infrastructure. Colorado Springs reveres and capitalizes upon our high educational attainment while also recognizing a need to further address workforce challenges. We also are willing to fund improvements in infrastructure essential for businesses and easier work commutes, greenways for tourism and quality of life, and more recently, K-12 education for the training of tomorrow’s workforce.
In the end analysis, we are controlling what we can control and doing a good job of it. That insight and resolve is serving us well.
Tatiana Bailey, Ph.D., is director of the Economic Forum at the University of Colorado at Colorado Springs. You can hear more about the national, state and local economies at the UCCS Economic Forum from 1 to 4 p.m. Thursday at the Ent Center for the Arts. Registration ($80) is open until noon on Wednesday, October 3rd at www.uccseconomicforum.com, and a few seats will be available at the door.