"Kee Points" with Jim Kee, Ph.D.

It’s a short week but I wanted to comment briefly on economic growth:


The Atlanta Fed’s GDPNow forecast for first quarter GDP growth (annualized) is currently running at 2.4%, while the New York Fed’s nowcasting model is expecting 3.1%. These will change as we move through the quarter, but growth along these lines would be a pretty good start to the year. Historically the first quarter is on average the weakest, and that has been the case during this expansion, which began in 2009. The current expansion is one of the longest on record (they range from 10 months to 10 years), but keep in mind that the data suggests that expansions keep going until they are brought to an end by macroeconomic shocks, so the age of an expansion doesn’t tell you anything about when the next recession will occur. This has been proven in fact by tests of “periodicity,” which indicate whether or not actual cycles (as opposed to random shocks) exist in the data (they do not). That means that each quarter of positive growth tells us nothing about when an expansion will end (Gordon Tullock writing in The Journal of Austrian Economics).


And markets are expecting stronger growth, which probably means they are placing a pretty high probability of President Trump succeeding in passing some meaningful tax reductions, spending increases (infrastructure), and regulatory reform. I say “probably” because it could also mean they are expecting an end to consumer deleveraging, and the beginning of stronger consumer spending. Interestingly, political strategist Greg Valliere mentioned this morning that the Trump administration will reportedly use 3%-3.5% growth projections over the next decade. That’s in line with the longer-term growth rate of the US economy, but as Greg points out, quite a bit higher than the slightly less than 2% annual growth experienced over the last decade or the 2% growth rates being projected by the Congressional Budget Office (CBO).


Why the strong growth assumptions? Because a big obstacle for the Trump Administration’s agenda is the near-term budget implications, which are widening budget deficits. The assumption of stronger growth is necessary in order to project higher tax revenues to the government, so it makes sense that the administration would want to deviate from the CBO’s 2% growth rate assumptions. “Dynamic scoring” (adopted by Congress in 2015 in certain areas) will help, as it assumes that tax cuts increase the incentives to work, save, and invest, which in turn increases future growth and tax revenues. And while dynamic scoring has been criticized as offering an “out” so that legislators can pass irresponsible and budget-busting legislation, it is actually internally consistent: It makes little sense to promote tax cuts as a growth stimulant and then not assume that stronger growth results (that’s what “static scoring” does).