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Anyone flying over holidays, or for regular travel, knows the headaches associated with airport security. You know the drill: Empty your pockets, remove your shoes, belt, jacket, purses and purse like objects and ensure each item is snugly placed in an appropriate bin. And don’t forget to remove your laptop from its case. On the other side, you have to quickly redo the procedure in reverse. At the General Mitchell International Airport in Milwaukee travelers might have noticed a “recombobulation area” greeting them after going through security. This area was created by the former airport director to provide some comic relief to weary travelers. The need to recombulate is not limited to airport travel. It’s time to recombobulate economic policy toward growth.
The past eight years have witnessed a severe recession followed by the slowest recovery and expansion in modern history. Until Election Day, the outlook for 2017 was for more of the same until we eventually slowed enough to slip into recession. Real-time data will always be volatile. Going forward, the election results have given a boost to business optimism, so business investment may finally improve.
The reason for renewed hope is pretty straightforward. Policymakers face tradeoffs when they govern and must choose what issues to emphasize. President Barack Obama could have pursued policies to encourage economic growth, and some of his speeches on entrepreneurship suggested he might do so. Such policies might have significantly improved the growth rates we experienced. Instead, time after time, he chose redistributive policies aimed at fairness or regulatory actions that put growth second or outright discouraged it.
Coming into 2016, the consequences of deemphasizing growth in lieu of alternative polices had been economic anemia. Then the economy downshifted markedly in the first half of 2016. Real GDP growth picked up again in Q3, growing 3.5% (annualized). Nevertheless, this generated little new enthusiasm as the acceleration was due almost entirely to temporary factors. The current expectation is that growth will settle in a range of 2.0 to 2.5% in 2017, slower than 2015’s still modest 2.6% but a bit better than the expected 1.6% growth of 2016.
The labor market continues to add jobs at a moderate but slowing clip. In 2016, the labor market added 2.2 million net new jobs compared with 2.7 million in 2015 and 3.0 million in 2014. The unemployment rate closed 2016 at 4.7% and should remain near this level for the next few years. The other key labor market indicator, average hourly earnings, rose 2.9% year over year, suggesting labor compensation rates are finally starting to exhibit more robust growth.
Personal consumption expenditures, which slowed in Q3 to 3.0% from 4.3% in Q2, are expected to improve modestly in Q4 largely driven by steady job and wage growth. But the economy will have to look elsewhere for sources of significant acceleration.
The great missing ingredient recently has been business investment. Real business fixed investment declined in three out of the last four quarters, and through Q3 it was down 1.1% year over year. It’s almost impossible to have a robust economy when business investment is contracting. Until business investment rebounds, the economy should at best continue to exhibit modest growth dependent largely on consumption.
The causes of weak business investment are not hard to find. Over most of the modern era, businesses operated at about 80% of capacity. In Q3 capacity utilization fell to 75%. At the same time, under the administration’s policies, and those that were expected had former Secretary of State Hillary Clinton prevailed in the election, the economic outlook would have remained tepid, with businesses on balance more inclined to scan the horizon for trouble than opportunity. Excess capacity and a worrisome future are hardly the ingredients leading to robust business investment.
Fortunately, business confidence has improved markedly as businesses anticipate a more growth-friendly administration. Business investment plans and purchases generally don’t change course overnight however. And so the middling economy experienced in recent years may persist for a few more quarters. Financial markets apparently are confident of better days ahead as evidenced by a substantial postelection pop in the stock market, rising interest rates, an upward sloping yield curve.
The incoming administration has a busy 100 days planned. The administration and Congress can make some changes quickly to improve the business environment, by reversing certain Obama administration executive orders, halting some damaging regulations now in train, or by overturning harmful and recently finalized regulations through the Congressional Review Act.
After this initial surge of activity there will be some heavy lifting as the administration and Congress attend to some of the most difficult issues facing our free enterprise system, including health, regulatory, and tax reform. The U.S. Chamber of Commerce is ideally suited to help craft policies going forward to ensure the free enterprise system surpasses its current potential growth and returns to a much healthier trajectory of 3%-plus growth for a sustained period.