US economy: The growth puzzle
After several years of weak demand and low inflation, investment is rising. But an increase in long-term growth requires a big jump in productivity
Sam Fleming in Chattanooga
© A structure using Branch Technology's large-scale 3-D printing technology. Alamy
In the foothills of the Appalachian mountains, Platt Boyd monitors a small platoon of 12-foot long robot arms that he hopes will help revolutionise one of America’s most technology-shy industries.
The Chattanooga, Tennessee-based founder of Branch Technology is vying to bring large-scale 3D printing to the construction sector, allowing elaborate architectural creations to be prefabricated with minimal human labour.
“It has massive potential,” says Mr Boyd, standing on his spartan shop floor near two emerald-green robots that are producing the skeleton of a 42-foot-wide structure. “The sector is one where there is a lot of low-hanging fruit.”
In the coming weeks Mr Boyd’s small start-up expects to take on 10 more staff, move to a 40,000 sq ft new factory and take delivery of four more $200,000 robots as it capitalises on America’s red-hot construction market.
Mr Boyd’s bullish outlook reflects rising optimism among US business owners about whether to make new investments. A record share of small businesses say now is a good time to expand in the US, according to data going back to 1973 from the National Federation of Independent Businesses. With global demand gaining traction and US wages accelerating, this is stoking hopes that the US could be on the cusp of higher sustained expansión.
The mood among bosses offers a counterweight to the warnings over the past few years that the US remains stuck in “secular stagnation” — a semi-comatose state of excess savings, weak demand, low inflation, and depressed interest rates. Much of the country’s dynamism has been concentrated in urban superpowers ranging from Los Angeles and New York to Austin, leaving large tracts of the country stranded and disillusioned.
Yet if companies start bolstering investment, it could give a recovery now in its ninth year further staying power, preventing the recent cyclical upswing from flaming out.
“We have seen a genuine acceleration in business investment in recent months which we expect to gain more traction this year, driving higher productivity in the United States,” said Bart van Ark, chief economist at The Conference Board think-tank. “If this cyclical pick-up lasts long enough it could start to lift America’s growth potential over the longer term, but it is too soon to call that turning point.”
Ripe for expansion: some smaller cities such as Chattanooga, with a population of more than 170,000, are in good economic health © Alamy
Even before Congress passed the recent tax cuts, the US saw two successive quarters of double-digit annualised growth in corporate spending on equipment. New projections from The Conference Board, shared with the Financial Times, show US productivity this year on course to grow 1.3 per cent — below rates seen before the crisis but the fastest pace since early this decade.
Broader economic data so far this year have been robust, with gross domestic product on track to rise 3.2 per cent in the first quarter, according to the Atlanta Fed and annual wage growth accelerating to 2.9 per cent in January.
At the same time, Congress is pouring fuel into the US economy by cutting taxes and lifting spending. Indeed, some economists, including Bill Dudley, the Federal Reserve Bank of New York’s president, believe the bigger risk is that the economy overheats, which could bring the expansion crashing to a halt.
To optimists, the economic health of smaller cities such as Chattanooga, with a population of more than 170,000, is a sign of an expansion capable of broadening its reach. Set along a winding stretch of the Tennessee River and surrounded by green mountains, Chattanooga used to be seen as a polluted, post-industrial wreck. But following several decades of regeneration efforts led by local government, unemployment in the broader urban region is now 3.4 per cent, (compared with 4.1 per cent nationally), the population is expanding, and small tech companies are joining large-scale manufacturers such as Volkswagen in expanding their operations in the city.
“There have been these waves where we have made real progress — the last few years have been one of those waves,” says Andy Berke, the city’s Democratic mayor, who adds that when he was growing up, the city was dying. “You have to take advantage of it while the economy is good.”
New data from the Brookings Institution covering the Chattanooga metropolitan area show the pace of job growth was 15.6 per cent for its young companies — defined as up to five years old. That is the sixth most rapid of the biggest 100 metro areas in the country from 2015-16.
Ken McElrath, the founder and chief executive of Skuid, a Chattanooga-based software company, says he located there in part because it is “crazy” how much cheaper it is than in downtown San Francisco or New York or Boston. “Because the cost of living is so low, you don’t need to pay them exorbitant wages,” he says.
Nevertheless, this remains an expansion on fragile foundations. Although the Brookings Metro Monitor data, to be released on Tuesday, show the recovery has broadened out, with 93 of America’s 100 biggest metro areas posting increases in output from 2015 to 2016, that growth is still concentrated within the most populous and successful cities.
The region around Chattanooga has benefited from inflows of foreign investment, lured in part by tax incentives, as well as a decision by the local utility to install ultra-fast internet infrastructure. Nevertheless the Brookings numbers show productivity in the metropolitan area actually dropped marginally between 2015 and 2016.
Mark Muro, director of policy at Brookings’ Metropolitan Policy Program, says that the 53 largest metro areas with 1m of population have generated 95 per cent of population growth and 73 per cent of GDP growth from 2010 to November 2016. “A limited core of the country has a vibrant economy while much of the remainder is being left behind,” he says. “It seems sort of academic to ask whether or not the country is in secular stagnation when we see such massive growth divides — it is an unsustainable situation.”
Within Chattanooga, residents talk of divided fortunes. In the city’s downtown a nascent tech sector has sprung up in its innovation district, hosting software and web-development firms sporting the sector’s obligatory ping pong tables, bean bags and office pets.
But while poverty has fallen in recent years, the city of Chattanooga still has a poverty rate of more than 20 per cent, and poverty among black residents is above 30 per cent, according to Census Bureau figures. Many residents, notably in historically black parts of town, feel excluded from the growth in the urban core, say local activists who bemoan the small size of its black middle class.
“They have come up with a strong template for how to grow a mid-size city,” said Ken Chilton, an associate professor at Tennessee State University. However “there are a whole group of folks being left out of the benefits”.
Larry Summers, former Treasury secretary, says a key question is whether 'extraordinary macroeconomic and financial conditions' are needed to generate adequate growth © Bloomberg
Sitting in the downtown restaurant where he works in the kitchen, Allen Shropshire says that while newcomers to the city with good skills have prospered, many locals have not. He is now taking a course in energy-saving construction from a local non-profit called Green Spaces and a partner organisation called Build Me A World. “Most weeks I am breaking my back just to get a decent amount for my family,” he says.
This sort of inequality is replicated across the country, creating a barrier to more durable growth given that so much spending power is held in the hands of well-off individuals.
Larry Summers, former Treasury secretary, revived the concept of secular stagnation to describe America’s economic plight in the aftermath of the financial crisis. He says growth has been running above potential and there is modest evidence of accelerating wages. But a key question is whether “extraordinary macroeconomic and financial conditions” are needed to generate adequate growth.
“We have one of the largest fiscal expansions in the country’s history starting from full employment, we have short-term real interest rates at essentially zero, we have the wealth effect of a stock market that has risen by 25 per cent a year, and all of that is only enough to get you 2.5 per cent growth in 2018,” he says. “The question is whether we are moving steadily at a higher level of investment that can be maintained indefinitely and sustainably financed. I don’t think some signs of increased spending subsequent to a major increase in asset prices, a huge fiscal expansion and a major increase in oil prices constitute convincing evidence.”
Needless to say, Trump administration officials have a very different take and are pointing to punchy growth numbers in the second and third quarters last year as evidence that the US has already embarked on a sustainably stronger growth trajectory.
Predictions in the administration’s budget of 3 per cent annual growth well into the next decade left most economists deeply sceptical, however. The Federal Reserve in December put the longer-term trend at just 1.8 per cent even after the tax cuts — similar to the Congressional Budget Office’s estimate.
A key part of the problem is demographics: absent big changes in immigration patterns, the population’s ageing will mean slow workforce growth, cutting away a key growth driver.
Big manufacturers such as Volkswagen are expanding their operations in Chattanooga © Reuters
To lift potential growth even modestly, the US would therefore need to see a jump in productivity — and a truly remarkable one if the kind of long-term growth figures President Trump has promised were to be achieved. Instead, the country’s productivity performance has been dire, with output per hour growing at an average of just 0.6 per cent a year for the past seven years, according to the Conference Board.However forthcoming research by the McKinsey Global Institute suggests there is potential for a rebound. It stresses the important role that the financial crisis played in dragging down US productivity. As its influence fades, productivity has the potential, at least, to grow 2 per cent a year across leading countries over the coming 10 years. “When we see the financial crisis after-effects dissipate we would expect productivity growth to speed up from the historic lows we have seen,” says Jaana Remes, a partner at MGI. “We would expect some bounceback.”
Much will depend on whether US companies match their enthusiastic predictions of higher technology investment with action, and whether the digital advances of recent years begin to diffuse among broader populations of firms and into sectors that are technological laggards. Company bosses have repeatedly claimed that tax reductions and looser regulation will induce them to spend more, but tax cuts have often shown up in dividends and share buybacks, rather than new technologies.
Indeed, the history of slow-adapting sectors like construction shows just how hard it can be to increase productivity. While US agriculture and manufacturing have raised productivity 10 -15 times since the 1950s, construction remains at the same level as 80 years ago.
Despite his enthusiasm about his own technology, Mr Boyd says it will take three decades to make such changes widespread. “It is a generation change,” he says. “It is not something that will happen overnight.”
Productivity boost: digital innovations could lead to higher growth
The US is far from alone in suffering a productivity slump in recent years — and new research covering a selection of advanced economies shows how severe the drop has been.
Productivity growth slumped about 80 per cent on average between 2000-04 and 2010-14, according to analysis from the McKinsey Global Institute covering the US, France, Germany, Sweden and the UK.
The decline is hugely significant given the role productivity plays in driving up living standards.
The first phase of the slowdown represented the waning of the technology boom of the 1990s. The second phase was driven by the crash in demand during the Great Recession.
This leaves reason for optimism about the future; if the financial crisis was responsible for a chunk of the slowdown, there ought to be scope for a bounce now that many of its effects have dissipated.
Some economists have warned that many of the biggest technological advances have already been made, holding back the potential for productivity growth.
But MGI says digital advances such as the introduction of new online marketplaces and machine learning could boost productivity.
To date, the benefits have not materialised, broadly because of delays in the adoption of new technologies and barriers to their use. In retail, for example, online sales are two times more productive than those made in stores, and yet they account on average for just 10 per cent of sales.
At the same time, there is a major sting associated with digitisation as labour markets become more polarised between winners and losers. That could exacerbate income inequalities and hold back spending and growth.
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