January 4, 4:40 pm EST
We kicked off the New Year continuing to discuss the theme of a hot stock market ahead (again) and a hotter than average economy (finally). Stocks continue to comply, with a big start – led by Japanese stocks today, up 2% on the day and up 4% on the year already.
It’s important to realize, the economic crisis was global. The central bank response was globally coordinated, led by the Fed. And, as we discussed early last year, everyone should hope Trumponomics works, because the global economy will benefit in coordination. And that’s what we’ve been seeing over the past year.
Of course, now we’re getting policy execution on that front, and we’re seeing the rising tide of the U.S. economy lifting all boats.
How high will that tide rise? As I said yesterday, if we add pro-growth policies that are being executed out of Washington, to an economy with near record low unemployment, cheap gas, near record low mortgage rates, record high consumer credit worthiness, record high household net worth, a record high stock market and near record low inflation, it’s hard to imagine the economy can’t do better than the long term average (3% growth) this year.
Let’s take a closer look at that economic growth picture.
Remember, in typical recessions, we should expect to get a big pop in growth to follow, due to policymaker responses to the slowdown and the natural upturn in the business cycle. In the Great Recession, we haven’t gotten it — after TEN years.
For the more than 50 years of history prior to the global financial crisis, U.S. economic growth averaged 3.5% (rolling four quarters). We’ve since averaged just 1.5% (over the past ten years). With that underperformance, the U.S. economy has foregone about $3 trillion dollars in real GDP growth, from being knocked off path by the global economic crisis. We’re due for a period to make up that ground.
On Tuesday we talked about the prospects of a return of “animal spirits” this year, for the first time in a long time. This is what can drive a period of economic growth that does better than the long term average. This animal spirits kicker may be the real theme of 2018.
But what is it?
Economics is about incentives. Economists think you’ll make rational decisions, with the incentive to best serve your interests. But emotions come into play. These emotions might cause you to be more risk-aversein times where policies incentivize you to take more risks, and vice versa.
This “emotion override” has been the problem over the past decade. The Fed gave us all abundant incentives to go out and borrow and spend, to stimulate the economy. But the scars of the housing crash, joblessness and overindebtedness were too great. People saved. They paid down debt. That didn’t trust the outlook. The Fed wanted us to take risk and they got risk aversion.
It has taken a regime change and an ultra-aggressive fiscal stimulus and structural reform response to finally break that mindset. The execution on tax cuts looks like the catalyst that has gotten more people off the fence, and believing in a rosier outlook. But I don’t think anyone would argue that confidence is broadly running hot (animal spirits) – much less, in a state of euphoria (which would justify concern of a top in markets and the recovery).
Robert Shiller (Yale economist) describes animal spirits like this: There are good times when people have substantial trust… They make decisions spontaneously. They believe instinctively that they will be successful.”
We’re not there yet, but we may begin seeing it/feeling it this year. And with that, we may see some hot growth over the coming years.
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