ECONOMY HAS ROOM TO GROW, HERE´S WHY / THE WALL STREET JOURNAL

Economy Has Room To Grow, Here’s Why

Recent reports overstate how fast the U.S. economy is growing, but strength overseas and the tax plan should give it a boost

By Justin Lahart


The evidence that the U.S. economy has been accelerating is thinner than the headlines shout.

But with the rest of the world economy improving and a possible tax-cut jolt coming soon, the good news is there is room for a pickup in growth.

In the years since the financial crisis, the U.S. economy has been in a deep rut: Growth averaged just 2.1% a year from the end of the recession to the first quarter of this year, making it the most tepid expansion on record. But lately GDP has perked up, growing at a 3.1% rate in the second quarter and 3.3% in the third. Put that together with steady hiring and an ebullient stock market, the economy looks very strong.

But much of the strength in GDP over the past two quarters wasn’t actually the result of stronger domestic demand. Instead, the growth was driven by a narrowing of the trade deficit and an increase in inventories, both of which will likely prove temporary. Absent trade and inventory swings, demand grew at an average rate of 2.4% over the past two quarters, matching the average pace over the previous four quarters.

DEMAND PICTURE
Change in gross domestic product at anual rate

Meanwhile, hiring, though strong, has been slowing since 2015. And the stock market’s rise has been driven not so much by U.S. economic growth as an increase in valuations and a pickup in profits from overseas. The S&P 500 trades at 18.4 expected earnings, compared with 16.8 times at the start of the year. And in the third quarter, earnings at companies in the S&P 500 with greater than half their sales abroad were up 13.4% from a year earlier, according to FactSet, compared with 2.3% for companies with less than half their sales abroad.

Overseas economies have been looking better all year. The surprise is that hardly any countries are struggling. Deutsche Bank economist Torsten Slok points out that the International Monetary Fund forecasts only six of 192 countries will register an economic contraction next year. That would be the fewest on record.

A WORLD OF CALM
Number of global economies contracting

The global economic environment counts as good news for the U.S. It should continue to bolster companies’ overseas profits, and it could push up U.S. growth. Similarly, the tax cut, if it passes, would increase companies’ profits and would provide a boost of around 0.3 percentage points to GDP growth next year, according to a preliminary analysis by Bank of America Merrill Lynch.

These effects mean U.S. growth should stay healthy but not accelerate too much from here.

With all of the optimism, it is worth watching just where the growth comes from.