The document discusses whether 3% economic growth in the US is sustainable. It presents arguments on both sides of the issue. Growth forecasts from analysts generally see GDP growth slowing to under 3% in 2019 due to factors like fading tax cuts, rising interest rates, and a global growth slowdown. Key indicators that will influence growth are business investment levels, trade balances, and how consumer and business confidence are impacted by rising rates. Attending an upcoming economic forecast luncheon is suggested to get the latest views on 2019 growth prospects.

1. Dennis Hoffman
Director
L. William Seidman Research Institute
Professor of Economics

2. U.S. Economic Growth
What is sustainable?
November 2018
Dennis Hoffman
Director
L. William Seidman Institute
Professor of Economics#econclubphx

3. 11/16/2018
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4. For today, is growth above 3 percent sustainable?
• The affirmative
– Tax cuts and dereg have
created a “new normal.”
– Consumer confidence is off
the charts.
– Animal spirits will take over
and spur on economic
growth.
• Contrarian viewpoint
– Capacity constraints will
bind.
– Inflation and Fed tightening
will mean stifling higher
interest rates.
– There’s too much debt.
– Global growth slowdown will
eventually prove to be
headwind.

5. • A neoclassical production function
• The output of an economy is a function of
productivity/technology, capital investment,
and labor.
𝐆𝐃𝐏 = 𝐀 ∗ 𝐅{𝐂𝐚𝐩, 𝐋𝐚𝐛𝐨𝐫}
Let’s look at what determines growth:
So A, CAP, or labor to grow GDP
Proponents argue that an
unfettered regulatory environment
with lower taxes will make this
happen.
Contrarians believe capacity
constraints, higher interest rates, and
debt will create too much headwind.

6. While it is easy to conceptualize the aggregate production
function, its components are hard to measure.
So, measuring growth is done by counting up expenditures
in the economy.
GDP = Consumption+Govt
Spending+Investment+Exports-Imports or
GDP=C+G+I+X-M
GDP growth can be boiled down to explaining growth
in these components.

7. 4.2% Q2 2018
3.5% Q3 2018

8. Key will be the growth in
the Green portion
–business investment

9. Going forward, it is useful to think about components in
predicting future growth in GDP.
Investment, inventory accumulation (or
run down), and the trade balance will be
important metrics.

10. Recent business investment
Contributions to GDP growth

11. Let’s examine forecasts
from some of the experts.

12. Note: 3Q18 reflects current Morgan Stanley GDP tracking as of October 15, 2018; 2017 and 2019 reflect 4Q/4Q change in real GDP.
Source: Bureau of Economic Analysis , Morgan Stanley Research
The shape of growth largely reflects the effects of fading tax stimulus.
2.0%
1.9%
2.5%
2.2%
4.2%
3.3%
2.4%
2.0%
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2015 2016 2017 1Q18 2Q18 3Q18E 4Q18E 2019E
Contributions to % Change in Real GDP
Percentage Points Personal Consumption Expenditures
Business Fixed Investment
Residential Investment
Net Exports
Government
Change in Private Inventories
Real GDP

14. Blue Chip Forecasts
top 50 business forecasters
• 2.9 percent GDP growth for 2018
• 2.6 percent GDP growth for 2019
• Only 5 of the 50 say more than 3 percent in 2018
and 19 while 3 of the 50 say below 2 percent in 2019

15. Nowcasts for Q4 2018
• Atlanta 2.9 percent
• New York 2.7 percent
• St. Louis 2.3 percent

16. What is holding back growth forecasts
below 3 percent?
• Equity buybacks vs. new investment in plant and
equipment
• Oil prices and oil investment
• Trade winds and global FDI
• Wage pressures/Fed tightening

18. $0
$50
$100
$150
$200
$250
2008-07-01
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2010-04-01
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2012-07-01
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2013-07-01
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2014-07-01
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2017-01-01
2017-04-01
2017-07-01
2017-10-01
2018-01-01
2018-04-01
Fixed Investment in Oil Wells(Billions)
2014
2017

19. $0
$20
$40
$60
$80
$100
$120 2008-09-01
2009-01-01
2009-05-01
2009-09-01
2010-01-01
2010-05-01
2010-09-01
2011-01-01
2011-05-01
2011-09-01
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2016-01-01
2016-05-01
2016-09-01
2017-01-01
2017-05-01
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2018-05-01
Oil Prices per Barrel
2014
2017
Close
55.28
Tues

20. Nationalism vs. Globalism
• As countries look inward and away from globalization, FDI
declines. Hence, the U.S. will have to depend more on
domestic fixed business investment than has been the case
historically.
• China is exacerbating this by putting restrictions on the
exportation of capital outside the East Asian nation.
• Raising tariffs will add fuel to the fire.

21. What drives business investment?
• Businesses believe that it will yield a significant return.
• If companies believe business conditions will slow in the
next several years, they will be hesitant to invest.
• They may believe that buybacks or simply hoarding cash is a
wiser move at this time.
• These adverse pressures will mount as rates go higher.

22. So what do we watch going forward?
• The levels of consumer and business confidence
• The levels of business fixed investment that show up
in quarterly reports in the coming year
• What the trade war does to net exports
• Wait and see

23. But if you really want to know what will happen
in 2019, there is only one thing to do: Attend the
Economic Forecast Luncheon.
Wednesday, Nov. 28, 2018
11:15 a.m. to 1:15 p.m.
Phoenix Convention Center
100 N. 3rd St.
Phoenix, AZ 85004

24. 55th Annual ArizonaStateUniversity
EconomicForecastLuncheon
Lee McPheters
Research Professor of Economics
W. P. Carey School of Business
Arizona State University
Director
JPMorgan Chase Economic Outlook Center
Wednesday, Nov. 28
11:15 a.m. – 1:15 p.m.
Phoenix Convention Center
Bart Hobijn
Professor of Economics
W. P. Carey School of Business
Arizona State University
John H. Cochrane
Rose-Marie and Jack Anderson Senior Fellow
Hoover Institution, Stanford