Speaking before the Economic Club of New York on Wednesday, President Robert S. Kaplan of the Federal Reserve Bank of Dallas offered a lukewarm assessment of anticipated U.S economic growth for 2020. The Dallas Fed is projecting GDP growth of 2.0 to 2.5% during the year.
Kaplan pointed to greater clarity in trade relations as a key driver of the growth outlook. He cited the signing of a Phase One trade deal with China, and lack of apparent further escalation in trade rhetoric between the two powers as supportive of the Fed’s base-case scenario. The passing of the USMCA trade agreement with Canada and Mexico—which is widely expected to face a congressional vote this week—would also aid growth.
He added that continued strong consumer confidence and tight labor market conditions—particularly a dip below pre-recession levels in the U6 unemployment reading (which includes jobless, discouraged and part-time workers desiring full-time employment)—were bullish indicators.
As a detractor, Kaplan said the Dallas Fed was expecting U.S. business energy capital expenditure to be lower by 10 to 15% for the year, making it “hard to become very positive on business fixed investment” in 2020.
But Kaplan’s most emphatic words of caution concerned the likelihood of longer-term below-trend potential GDP growth, due to structural and demographic challenges beyond the capacity of any central bank to effectively address.
Workforce growth: Needed, if not wanted
First among these, he said, is the slowdown in U.S. workforce growth, where more than half of growth over the past 20 years has been composed of immigrants and their children. Kaplan opined that the U.S. could be well-served by restructuring its immigration system into a skills-based and employer-focused model along the lines of Canada, in which foreign workers are granted residency and “backward-integrated” based upon projected labor force requirements.
He also pointed to challenges in productivity growth, which has leveled around 1.1% since the 2000’s, owing to technology-enabled disruption in the economy: a trend which will likely only intensify in coming years.
While technology’s effect on productivity is not new, the impact of distributed computing power is having drastic and unprecedented limits on seller pricing power. As a result, Kaplan said most businesses are investing more in technology and pursuing mergers in order to address the need for bigger scale to withstand the threat of disruption. This has had disproportionate effects on U.S. workers, mostly along lines of educational attainment.
Kaplan said the Dallas Fed views globalization as an opportunity, despite a prevailing “threat” narrative that blames foreign workers and offshoring for wage stagnation. He said today’s threat is likelier due to technology-enabled disruption and is probably U.S.-based. Rather than rejecting globalization outright, he said, the U.S. should further segment its trade relationships and pursue closer ties to Canada and Mexico, where supply chains and logistics are already deeply integrated.
Unfunded entitlements
Finally, Kaplan cited the challenge of growing government debt-to-GDP levels, with publicly held debt currently equal to 78% of current economic output, and a present value of $59 trillion in unfunded entitlements. He said many states would be ill-equipped to address this burden through fiscal policy, given that 35-40 states nationwide are already trending flat or lower in workforce growth. The country’s ability to withstand this challenge so far has been largely due to the dollar’s status as the world’s reserve currency. If global dollar-denominated reserve holdings were adjusted closer to market weight, he said, the situation would be much graver.
“Note that none of these trends have to do with monetary policy. Central banks are trying to make up for these structural trends through policy,” Kaplan said, citing the need for comprehensive structural reforms and infrastructure investment rather than expecting monetary policy to do things it cannot actually do.