Whether economic growth under Trump continues past the 2020 election depends on whether the expansion is young or old in the business cycle.
American expansions (such as those of the 1980s and 1990s) usually last 5 to 7 years while economic dips normally last 1 to 2 years. Because the economy technically began to recover in the middle of Obama’s first term it has been assumed by many economists that the present expansion is late in cycle and that a correction during the next year or two is overdue.
But where the expansion is depends on what theory of the business cycle is used.
The best theory of the business cycle is Alexander Hamilton’s theory which says the business cycle is driven by changes in demand; demand which is usually concentrated in one or a few economic sectors.
Under this sector-focused demand model the present expansion is actually early or middle aged. Whatever “growth” took place under Obama was very weak due to to his aggressive anti-business policies. Those detrimental policies suppressed the normal increase in economic demand that should have followed the 2008 crash. The only reason economic performance was not worse was because the Federal Reserve kept monetary policy abnormally loose to partially mitigate the negative effects of Obama’s crackpot economics.
In effect, both of Obama’s terms in office were, from a demand cycle perspective, an 8 year recession that Trump’s pro-growth policies have only recently begun to correct for.
Under Hamilton’s theory of the cycle, expansion begins with a sharp increase in demand for goods or services in a particular leading sector or sectors. Lead sectors then create a downstream chain of economic dependencies with other sectors that benefit from doing business with the boom sector(s).
Both leading and dependent sectors allocate business operations, personnel, and resources in support of growing sector demand. This allocation of resources cascades through the economy and drives the growth cycle. When demand eventually plateaus, the effect also cascades through the economy as both formerly leading and dependent sectors reduce operations, personnel, and resources. This re-allocation of resources cascades through the economy and drives the bust cycle.
To give a simplified version of this theory, assume a national economy is dominated by the bakery sector and there is a surge in demand for baked goods –
- The bakery sector reacts to increased demand by increasing its baked goods output through production increases, hiring more workers, and gathering more resources.
- Demand in the bakery sector creates a chain of dependencies with dependent sectors such as the dairy sector and flour sector that benefit from increased business with the baked goods sector.
- Dependent sectors react to increased demand by allocating more personnel and resources towards production.
- The economic effect of leading and dependent sectors chasing increasing demand cascades through the economy to generate a national economic boom.
- Eventually, demand for baked goods plateaus and begins to decline.
- The baked goods sector reacts to decreased demand by reducing its baked goods output through production cuts, layoffs, and selling off resources.
- Dependent sectors such as the dairy sector and flour sector react to production cuts in the lead sector with their own production cuts, employee layoffs, and asset selloffs.
- The economic effect of formerly leading and dependent sectors keeping pace with decreased demand cascades through the economy to generate a national economic bust.
Two of the most important lessons Hamilton’s theory teaches are, first, that there is no way for monetary policy (or any economic policy of any kind whatsoever) to prevent the bust phase of the business cycle because there is no way for anyone to anticipate exactly what future demand levels will be in any sector; nor even in which sector the changes will be concentrated in.
Second, because of compound interest there is no need for economic policy to worry about stopping the bust phase of the business cycle: As with an investment portfolio, a national economy will grow over time thanks to compound interest (and despite economic declines) so long as growth periods are strong. The best economic policy is a Capitalistic one that will seek to foster a free market climate where the duration and level of economic growth is maximized during the boom phase and that minimizes the duration and level of the bust phase.
From a Hamiltonian perspective that focuses on demand in boom sectors, the moderate economic recession of the early 2000s and severe recession in 2008 were caused by demand plateauing in the tech sector after the 1990s tech boom and demand crashing in the derivatives and housing markets in 2008.
But as far as sector demand looks in 2019’s economy there is little indication of overheating like in 2000 or 2008 simply because normal sector demand growth was depressed from 2009 to early 2017.
With the flat-lining of demand from 2009 to 2017, no downstream dependencies were created with sectors that are currently weak.
The current weakness in the housing market is the result of the sector still not having recovered from the 2008 crash and because the sector is adjusting to the Federal Reserve adjusting interest rates to more historically normal levels (and levels that a stronger economy should be able to absorb) after 8 years of abnormal Fed policy. And since other sectors have been wary since 2008 of becoming overly dependent on housing, there is minimal risk to other sectors being affected by a protracted correction in housing.
The decline in the social media sector is an interesting case study because the entire sector is notable for having very limited dependencies with other sectors, even in the best of times. Social media’s only significant dependent relationship is with the marketing sector because marketeers purchase social media datasets about millions of users of Facebook, Google, etc, to plan advertising campaigns or to buy advertising space on those social media platforms. What is a threat to demand for the social media sector is that marketeers are discovering that datasets from social media companies are not more statistically informative than traditional marketing surveys that used sample sizes of hundreds or thousands of consumers.
However, the rest of the tech sector that is not based on social media – such as Cisco, Amazon, Apple, Oracle, Microsoft – appears to be, if not growing rapidly, stable and immensely profitable. The only weakness in this group is Apple because iPhone demand appears to have peaked. Nevertheless, Apple could suffer large decreases in demand for iPhones and still be one of the most powerful corporations in the world.
The cost of tariffs on Chinese imports to American businesses are offset on the benefit side of the cost-benefit equation by increased demand and economic activity for goods produced by domestic manufacturers. Domestic industry benefits from the tariffs because they are no longer competing at an artificial disadvantage created by the Chinese government’s market distortions.
In terms of demand growth, the bright spot is consumer spending which is 70% of the American economy. With strong wage growth and low unemployment consumer demand by itself should be sufficient to keep the expansion going for at least a year after the 2020 election.