A Few Economic Insights: US and the Southeast Steven Sheffrin Tulane University Murphy Institute

Today’s Talk Three Topics: Quick Review of US Economy The Debate About Feasible Economic Growth A Look at Economic Performance in the Southeast region

US Economy Key Highlights Unemployment at 4.3% Below pre-recession levels Most likely below “natural rate” signaling to Fed that inflation may rise.

Inflation “Core” inflation—excluding energy price swings is 2% (actual inflation similar) CBO forecasts this for their long run trend

Interest Rates Rates are low now by historical standards, but expected to rise somewhat in next few years Continued economic growth Higher deficits pushing up rates

Equity Markets Stock market levels substantially exceed pre- recession levels

LAGGING AREAS: Investment (left) Housing Starts (right)

Trade Deficit US has had persistent trade deficits, now 2% of GDP—spends more than it produces Relatively little to do with “competitiveness”

Overall Upshot Since the Great Recession, US economy has reached full employment. Labor markets seem tight and no imminent inflation. Consumption spending has made up for the muted performance of fixed investment and housing But what about economic growth and the future?

ECONOMIC GROWTH The recovery has seen slow growth compared to other recoveries. Forecasts for future growth are slower than historical averages—CBO at 1.8% per year.

Trump Administration Disagrees They claim 3% growth is possible after a few years Why does this matter? Implies large change in living standards. Over 20 years, GDP would be 25% higher. Power of compound interest! Makes it possible to spend more or tax less without incurring large debt/GDP ratio. But…..

Arithmetic of Economic Growth Growth of GDP Equals Growth of Labor Force + Growth of Output/Worker (Productivity)

HISTORICAL AND TYPICAL FORECASTS From: Congressional Budget Office Note first column vs last (most difference in labor force growth) But also see the differences for sub-periods.

PRODUCTIVITY GROWTH Been slow for over a decade. CBO actually has a slight pickup in growth rate. Many theories: Growth in service sector with slower productivity (Baumol and “cost disease.”) Relatively slow investment last few years. Productivity growth from tech sector peaked and we do not see as much as we may have expected GDP is not picking up quality change in our lives (from technology)

LABOR FORCE GROWTH A number of factors contribute to this slowdown Long term trend in declining male labor force participation rate We already achieved gender work balance so no new opportunities for growth of female participation. Now flat. Aging of baby boom and rush of retirees. Early exit of near retirees from recession (no McDonalds for me!) More young adults in school. Possible effects of disability payments for prime age workers. Increasing health related issues (see next slide). Not clear if cause of effect.

CAN WE OVERTURN THESE TRENDS? BEST HOPES Productivity Reform international tax code and spur domestic investment. Investment levels are low so some possibilities. Eliminating some regulations can lead to higher investment and more start-up and maybe some breakthrough investments. Labor Force Let naturally higher growth draw more people into employment. Tougher on welfare state for prime age adults without children Immigration—increase levels and reform programs There has been natural variation. So it is not immutable.

Overall Southeast is similar to US Unemployment Rate Reaching new lows General Trends in Manufacturing Purchasing index on an upwards trajectory

But Diversity Within Region UNEMPLOYMENT Sixth District follows US pattern But Louisiana is an outlier OVERALL ECONOMIC GROWTH Based on summary of indicators Clear ranking of growth since 2010 Florida, Georgia, Tennessee, Alabama, Mississippi, Louisiana

What Does the Atlanta Fed Say? Beige Book provides economic anecdotes Overall positive for next 3-6 months Tight labor market overall but input costs steady Generally positive on tourism and hospitality ( but dip in international visitors in South Florida?) Solid growth for manufacturers Agriculture conditions weakened Oil and gas inventories remain elevated

ONE LAST PARTING THOUGHT No evidence that recoveries and good times just “end” by themselves. Recessions usually caused by: Fed raises rates to stop inflation (typical pattern in 80s) Speculative frenzies (late 90s and 2007) External oil shocks (73, 75) Nothing like this appears on the horizon right now Markets high but not out of control. No inflation threat. We could use a commodity boom! At least here.