This guest commentary was written by Mike O'Rourke of JonesTrading. This piece was originally published 5/23.
Source: Gage Skidmore
OMB Director Mick Mulvaney unveiled the President’s budget today. Mulvaney delivered a message of cutting frivolous Government spending while advocating strong economic growth. The media quickly honed in on the plan’s major drawback, which is that it double counts the growth to both eliminate the current deficit and close the revenue holes created by the expected tax cuts.
Furthermore, the President’s budget is predicated upon long run GDP growth of 3% after 2019. In a passionate explanation, Mulvaney asserted the foundation of Trumponomics is sustained 3% economic growth. Noting that critics have called 3% growth an “absurd assumption” Mulvaney argued:
“It used to be normal. Ten years ago, it was normal. In fact, it's been normal for the history of the country. I think the average, over the 240-odd years that we've been a country has been over 3 percent. It's certainly been over 3 percent since World War II.”
Mulvaney went on to criticize the 1.9% growth forecast of the Obama Administration and the Congressional Budget Office (chart below). Mulvaney asserted:
“That is a pessimistic look at what the potential for this country and for what this country's people is. We reject that pessimism, and say, "You know what? We probably should have gone in and assumed 3.5 or 4 percent growth because that would be aggressive. Three percent growth is just getting back to normal.”
As we all know too well, past performance is not indicative of future results. We would not venture to forecast the growth rate of US GDP in 2020 and beyond. What we do know is that Mulvaney’s statements about historic GDP growth prior to 2001 are correct, but since then, 2004 and 2005 are the only years in which the US had grown at a rate of more than 3% (chart below). Average annual GDP growth since 2001 is 1.8%, and since 2010, it is 2.1%.
We are talking about a time period in which the FOMC has pursued the easiest monetary policy in the history of the country through a zero interest rate policy and purchasing assets. In addition, there has been massive deficit spending that has taken Federal Debt to GDP from 65% in 2008 to 108% today (chart below).
Considering trend growth has only been 2% amidst these beneficent factors, 3% growth seems like a longshot. The tax cuts and deregulation won’t be enough. It is the globalization trend over the past two decades that drove the structural changes in the economy that took trend growth from 3% to 2%. Ironically, it is railing against this globalization that has swept Donald Trump into office.
Without structural changes along the lines of the Border Adjustment Tax that encourages US production and discourages imports, sustainable 3% growth will likely remain beyond the nation’s reach.
This is a Hedgeye Guest Contributor research note written by Michael O'Rourke, Chief Market Strategist of JonesTrading, where he advises institutional investors on market developments. He publishes "The Closing Print" on a daily basis in which his primary focus is identifying short term catalysts that drive daily trading activity while addressing how they fit into the “big picture.” This piece does not necessarily reflect the opinion of Hedgeye.