|WACO, December 24 - The U.S. economy has been growing at a modest pace, with job gains and housing market recovery.
However, the recent situation in Washington (with the partial shutdown and potential debt ceiling issues) has been weighing on the economy. Even though there have recently been some signs of a greater ability to work together to resolve issues, reprieves have been largely temporary and, even now, signs of future conflict are surfacing. While economic growth is expected, underlying fiscal issues have not yet been dealt with and continue to dampen performance expectations, particularly as the next set of deadlines nears.
The partial shutdown this fall highlighted the serious problem in our federal government of an inability to agree on a budget. The last time the Senate actually passed a budget was in 2009, with continuing resolutions providing budget authority for Federal agencies to keep operating since then. However, the Congress struggled to even reach a joint resolution, and a 16-day partial shutdown of the federal government caused a significant disruption. Given the constraints that were placed on spending as a percentage of the economy during the 2011 meltdown, it is doubtful that a comprehensive budget can be enacted in the near future.
This month, a short-term budget compromise was reached (although the details still must be ironed out), but the debt ceiling remains an issue to be dealt with after the first of the year. In fact, some lawmakers are already demanding more concessions despite the fact that there is no practical alternative but to increase borrowing capacity. At some point in time, a real and meaningful budget must be passed (not just a stop-gap action to keep the doors open a few more weeks or months). Until the United States government begins to move toward a fiscally responsible and sustainable path through the budgeting process, our future prosperity is compromised to some extent. If the decision is made not to honor our debts (highly doubtful even in this environment), economic performance would certainly be affected.
There is reason to believe that the U.S. manufacturing sector is set for a rebound after more than a decade of job losses and factory closures. Strength in basic industries such as manufacturing is important to long-term prosperity, and a shift in locations back to the United States could notably alter future performance. Over time, the United States is becoming more competitive, with one of the highest rates of output per hour worked and rising productivity. The United States also has advantages in shipping and other logistics. At the same time, wage rates in China, which is a primary competitor for certain types of manufacturing operations, are rising rapidly (double digits per year), eroding cost advantages.
Demographic trends are leading to changing income patterns. Over the next few decades, the national economy will see people shifting from peak earnings to reduced (or eliminated) incomes at record rates as the baby boomers reach retirement age. While U.S. median income may well fall, it is less clear, however, that economic decline will follow. Spending and income are not perfectly correlated, and retirees will be spending wealth accumulated over decades. As money now sitting on the sidelines in the form of retirement accounts is reinserted into the economy, there will be a definite upside. It is also possible to have both (1) median incomes falling due to a bulge in the retiree population and (2) rising living standards for working families happening at the same time.
The trade deficit has recently been improving. The rise in domestic oil production, which has been enabled by technological advances such as hydraulic fracturing (fracking), is helping in two ways: reducing the need for imported crude and increasing the potential for exporting various refined and other petroleum-derived products.
As European and other global economies improve, there will be more capacity for those countries to afford to buy US products. The surge in the oil industry is leading to substantial economic activity in several regions of the United States. It is also is likely to keep increasing the proportion of crude oil produced domestically, reducing the need for imports.
Given these underlying conditions, The Perryman Groupís most recent outlook for the US economy calls for continuing moderate growth. Real gross product (RGP) is projected to grow by 3.28 percent per annum over the next five years, reaching $14.56 trillion by 2018 (an increase of $2.55 trillion over the period). Employment is forecast to expand at a 1.56 percent annual pace, resulting in an addition of 10.9 million jobs.
Future economic growth patterns will be influenced for better or worse by the degree to which Congress and the Administration move toward a path of fiscal sustainability. While recent agreements have put off the worst of the problems for a brief period, a long-term solution has yet to be offered. Education and income trends have the potential to curtail performance if outcomes are not improved, but worst-case scenarios which have recently received media coverage are unlikely to play out. The energy sector will likely remain a key aspect of economic health, both by generating a large economic stimulus and by improving US balance of payments and energy security. All in all, The Perryman Groupís projections indicate continued expansion through the forecast horizon.
Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.