By Tatsuya Sasaki / Yomiuri Shimbun Senior WriterAt the beginning of February, the plunge of stock prices in the United States rocked financial markets around the world, but favorable conditions prevail in the U.S. economy. The U.S. economic recovery period is already in its ninth year, and for the government, there is no doubt that a phase has begun in which regulating the accelerator and brakes will be difficult.
“After years of stagnation, the United States is once again experiencing strong economic growth,” U.S. President Donald Trump said emphatically at the World Economic Forum’s annual meeting in Davos, Switzerland, on Jan. 26.
In line with his words, the U.S. economy is robust. The real growth rate of the gross domestic product for October to December 2017 was an annualized 2.6 percent.
It decelerated from the July to September rate of 3.2 percent, but it can be said that it almost achieved the goal of 3 percent growth sought by the Trump administration.
Compared to Japan, which has seen sluggish consumption due to uncertainty about the future and the reluctance of companies to invest over concerns about shrinking domestic markets, the increase in consumer spending and capital investment in the United States is impressive (see chart 1).
In the United States, much attention is paid to the annual year-end sales battle in November and December, as a reflection of consumer spending.
According to the U.S. National Retail Federation, U.S. retail sales during the 2017 year-end sales season rose by 5.5 percent over the previous year to about $690 billion (about ¥74 trillion), recording the largest growth since the 2008 financial crisis caused by the collapse of U.S. investment bank Lehman Brothers.
Spending is being boosted by an improvement in employment conditions, and the “wealth effect,” in which rising stock prices encourage stockholders to loosen their purse strings. Sales excluding brick-and-mortar stores in the year-end season rose 11.5 percent, and the rapid growth of internet retailers such as Amazon appears to be shoring up the overall level of spending.
Capital investment in transport equipment and construction machinery, among others, is strong. The rise in crude oil prices is also expected to lead to a recovery of investments related to shale oil.
Be that as it may, the Trump administration is stepping on the economic accelerator, with the implementation of major tax cuts and improvements to infrastructure.
The scale of the tax cuts is about $1.5 trillion over a 10-year period. It has many merits for business, including cutting the corporate tax rate from 35 percent to 21 percent, as well as allowing immediate depreciation (see below), which enables the deduction of the full value of capital investments from taxable income at the time they are made.
Infrastructure improvements, mainly to the road network and bridges, are the “second arrow” following the major tax cuts. In his State of the Union address on Jan. 30, Trump expressed his intention to increase the size of the investment from the initial $1 trillion over 10 years to $1.5 trillion.
In response to the tax cuts, the International Monetary Fund revised the projected U.S. growth rate in its January economic forecast upward significantly from its prediction in October last year (see chart 2) — an increase of 0.4 points in 2018, and 0.6 points in 2019. The IMF forecast that the GDP will be boosted by 2020 by 1.2 percent more than if the tax cuts had not been made.
In the United States, an increasing number of companies are announcing pay increases and new investments. In the field of economics, optimistic expectations that influence business fluctuations that are difficult to explain logically are referred to as “animal spirits” (see below ).
Tatsuhiko Yoshizaki, a chief economist at Sojitz Research Institute, said, “It is about 10 years since the Lehman shock, and U.S. businesses and investors have regained their animal spirits.”
There is a high possibility that the U.S. economy’s virtuous cycle could continue for the time being.
Adding ‘fuel to the fire’
On the other hand, when the accelerator is pressed too strongly, a vehicle’s motion could become unsteady. It is the same with the economy.
On Feb. 5, the Dow Jones industrial average on the New York Stock Exchange fell more than 1,000 points in a single day, causing a simultaneous worldwide plunge in stock prices. The trigger was employment statistics showing a year-on-year increase in hourly wages of 2.9 percent (see chart 3), the largest growth since June 2009. The heretofore sluggish growth in wages increased significantly, leading to the spread of predictions that the economy would overheat, spurring interest rate hikes.
According to a report by a U.S. research firm, since the administration of President John F. Kennedy (1961-1963), there have been seven major tax cuts, but the average rate of unemployment during the period was 7 percent. Currently, it is 4.1 percent. This is considered a state of “full employment” in which anyone who wishes to work can find employment. The report stated, “The phrase ‘adding fuel to the fire’ comes to mind.”
Major tax cuts and fiscal deterioration come hand in hand. In his budget message on Feb. 12, Trump indicated that the federal budget deficit over the next 10 years would increase to more than double projections from last year, reaching an estimated $7 trillion.
Referred to as an “economic barometer” in the United States, long-term interest rates rose and are approaching 3 percent. The association with an increase in the interest burden on businesses, which negatively affects their performance, is destabilizing stock markets.
It is possible that the long-term interest rate rise will include aspects not only of a “good interest rate increase,” in which the increase is caused by optimism about economic recovery, but also elements of a “bad interest rate increase,” in which concerns over fiscal deterioration cause the price of government bonds to fall and interest rates to rise.
The U.S. economic recovery has continued for more than 100 months, making it the third longest in history (see chart 4). The average length since the end of World War II is about five years. It is not unusual for the direction of the economy to change at any time.
If fluctuations in stock prices due to fears of economic overheating caused by the major tax cuts are prolonged, there is a fear that the “animal spirits” of corporate managers and consumers could wane. Rising wages would lead to inflation, and there is also the possibility that the U.S. Federal Reserve Board could speed up the pace of interest rate hikes.
Will the Trump administration push through with its “America First” policy while dealing with the dilemma that movements that would ordinarily be welcomed may cause uncertainty in financial markets? If the bent toward protectionism, such as a major revision to the North American Free Trade Agreement, strengthens, fears will spread all the more.
Trump also said the following in his speech at the Davos Conference.
“I will always put ‘America First,’ but that doesn’t mean ‘America alone.’ When the United States grows, so does the world.”
In this, one can see a glimpse of a slight shift away from absolute devotion to “America First.”
What is wanted is “safe driving” that pays attention to the rest of the world.
■ Immediate depreciation
A mechanism by which the full amount spent on capital investments, such as building factories, can be deducted from income as expenses (deductible expenses) in a lump sum for the fiscal year in which the investments are made. Ordinarily, the amount is factored into expenses in installments over a period of several years, but the ability to include the total amount in a lump sum facilitates new investment by companies. In this instance, the United States has implemented it as a temporary measure for a term of five years.
■ Animal spirits
A term used by the economist John Maynard Keynes in his book “The General Theory of Employment, Interest, and Money,” to describe the hopes for the future that motivate decision-making in conditions of uncertainty. Animal spirits are believed to play a role in stimulating economic activities.Speech