The second-quarter trailing gross domestic product growth rate of 4.1 percent announced in late July by the U.S. government says the economy is strong. But how strong and for how long? And what does it mean for Springfield?
On the macro level, U.S. economic growth continues to accelerate despite short-term increases in interest rates, the onset of modest tariffs and some cooling in European and emerging market growth. Near full employment, strong company earnings reports and the impact of recent tax reform helped propel the U.S. economy along, although admittedly some spending was pulled forward as U.S. exporters rushed to ship their goods ahead of potential global retaliatory tariffs.
What made the 4.1 percent growth rate noteworthy was that it came on the heels of the first-quarter’s 2.8 percent rate, making the second-quarter pace the largest increase in four years. The average pace since June 2009 had been hovering around 2.2 percent.
It would not surprise me if GDP growth surpasses 3 percent this year and approaches a 3.5 percent pace. The key drivers are:
• steadily increasing employment levels;
• growth in business and consumer confidence translating into robust retail sales, with investment in infrastructure and business capital equipment;
• continued recovery in the housing market;
• a positive tailwind from federal, state and local government budget increases;
• U.S. wealth and stock prices at high levels; and
• an ongoing boost from the federal tax reform plan.
In the Springfield metropolitan statistical area, we are seeing a boost in housing activity, as well as manufacturing and retail establishments. Notice the number of construction cranes and highway projects on your daily commute. I find it a great barometer of economic health when you recognize this thriving area supports more than 800 restaurants. These anecdotal observations play a role in the overall second-quarter growth rate increase.
GDP remains strong despite the recent increase in stock market volatility and the onset of tariffs sparked by the U.S.-led trade conflict. We believe a recession is still a considerable way off. And this recovery should easily surpass our longest expansion, which lasted from 1990 to 2000. We could envision this expansion lasting three to four more years.
The May unemployment rate in Springfield was 2.7 percent, well below the national rate of 4 percent. We benefit from a diverse economy, led by health care and education. While we aren’t recession-proof, we are very resilient.
As such, it is important for us to have some peripheral vision about what could slow this upward momentum. There is a shift coming in demographics that could pose a challenge to our longer-term economy.
GDP growth is primarily a function of productivity and labor force growth. With long-term productivity averaging less than 1.5 percent, and workforce growth of 0.5 percent, economic growth of 2 percent has become the new normal. With productivity growth struggling to increase at 1.5 percent or better, we must rely on workforce growth to take our long-term trend higher to prefinancial-crisis levels. The challenge is that demographics and potential immigration policy may not be supportive of robust workforce growth.
What Springfield has going for it is that 26 percent of our population is 25-44 years old and 18 percent is under the age of 18. While nationally there is a challenge to find qualified workers in the prime working years, our ability to attract young workforce entrants is enhanced by our higher education institutions.
Back to the current macro environment, we must all realize the seeds of the end of this business cycle are being be planted. Stocks have afforded little more than an up-and-down ride over the first half of the year. Long-dormant inflation also has begun to accelerate a bit, and the Federal Reserve has responded with faster rate hikes than the markets would have expected a year ago. The combination of rising inflation, higher interest rates, weaker credit markets and some unforeseen future economic shock may ultimately end this expansion and start the business cycle all over again.
Regardless of how long this expansion lasts, in Springfield we are fortunate to have a diverse economy that can weather the next downturn. Until then, let’s enjoy the 4 percent growth and go out and support one of the many local businesspeople who are opening new businesses in our area and contributing to our tax base.
Don Davis is a vice president and portfolio manager with Commerce Trust Co. in Springfield. He can be reached at firstname.lastname@example.org.
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