The Outlook for the U.S. Economy and

the Policies of the New President

Jason FurmanSenior Fellow, PIIE

Peterson Institute for International Economics | 1750 Massachusetts Ave., NW | Washington, DC 20036

SNS/SHOF Finance Panel

Stockholm

June 12, 2017

Outline

1. The short-run outlook

2. The prospects for long-run growth

3. The challenges of inequality and labor

force participation

4. President Trump’s policy agenda

Measures of Labor Underutilization Have

Recovered

Note: Dashed lines indicate averages from December 2001 to December 2007. Shading denotes recession.

Source: Bureau of Labor Statistics, Current Population Survey; author’s calculations.

Unemployment Rate

Discouraged and Other Marginally Attached

Involuntary Part-Time

U-6 (Underemployment)

Rate

0

2

4

6

8

10

12

14

16

18

2000 2003 2006 2009 2012 2015

Alternative Measures of Labor UnderutilizationPercent

May -17

The Quits Rate is Above Its Pre-Recession

Average, While Openings Are Tied for A Record

High

Note: Dashed lines indicate averages from December 2001 to December 2007. Shading denotes recession.

Source: Bureau of Labor Statistics, Job Openings and Labor Turnover Survey; author’s calculations.

Quits Rate

Job Openings Rate

Apr-17

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2001 2003 2005 2007 2009 2011 2013 2015 2017

Quits and Job Openings RatesPercent of Total Nonfarm Employment

Pre-Recession Average

Inflation Has Generally Been Below the Federal

Reserve’s 2-Percent Target

Note: Shading denotes recession.

Source: Bureau of Economic Analysis, National Income and Product Accounts; Federal Reserve; author’s calculations.

PCE

Core PCE

Apr-17

-2

-1

0

1

2

3

4

5

2000 2002 2004 2006 2008 2010 2012 2014 2016

Personal Consumption Expenditures Price InflationTwelve-Month Percent Change

Federal ReserveTarget

Compensation Growth Has Been More Mixed…

Note: Shading denotes recession.

Source: Goldman Sachs; author's calculations.

2017:Q1

0

1

2

3

4

5

6

2000 2002 2004 2006 2008 2010 2012 2014 2016

Goldman Sachs Wage Tracker (Nominal)Four Quarter Percent Change

…But Real Compensation About What Would Be

Expected in a Low Productivity World

Note: Shading denotes recession. Compensation adjusted for inflation using the CPI-U price index.

Source: Goldman Sachs; Bureau of Labor Statistics; author's calculations.

2017:Q1

Average2001 Cycle

Average: 2007 Cycle

Average: 2001 Cycle

Average: 2007 Cycle

-3

-2

-1

0

1

2

3

4

5

6

7

2000 2002 2004 2006 2008 2010 2012 2014 2016

Productivity Growth and Goldman Sachs Wage Tracker (Real)

Four Quarter Percent Change

NonfarmBusiness

Productivity

Wage Tracker

Gaps Have Closed In the United States

Source: International Monetary Fund, World Economic Outlook.

United States

-4

-3

-2

-1

0

1

2010 2011 2012 2013 2014 2015 2016 2017

Output GapPercent of Potential GDP

2017

Going Forward Growth Will Primarily Come from

Potential

Note: Potential GDP growth is the intercept of an Okun’s law regression using four-quarter changes in real GDP and the employment-population ratio from 2007:Q1 to 2016:Q4.

All growth rates are Q4/Q4 for the year shown.

Source: Bureau of Economic Analysis, National Income and Product Accounts; Bureau of Labor Statistics, Current Population Survey; author’s calculations.

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2013 2014 2015 2016

Cyclical Potential

Real GDP Growth: Actual vs. PotentialPercent

Measures of Optimism Have Remained Strong

Even While Financial Markets Appear to No Longer

Be Expecting Stimulus

Source: Conference Board; National Federation of Independent Business; National Association of Home Builders; Business Roundtable; Board of Governors of the Federal

Reserve System; author’s calculations.

10-year Treasury

Yield (Left Axis) Trade-

Weighted U.S. Dollar (Right Axis)

Jun-17

110

115

120

125

130

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan 2016 Apr 2016 Jul 2016 Oct 2016 Jan 2017 Apr 2017

Government Bond Yields and Exchange RatesPercent Index, Jan 1997 = 100

U.S. Election

Consumer Confidence

May-17

Small Business Optimism

Housing Market IndexBusiness Roundtable CEO Economic Outlook

0

20

40

60

80

100

120

140

Jan 2016 Apr 2016 Jul 2016 Oct 2016 Jan 2017 Apr 2017

Consumer and Business ConfidenceIndex

U.S. Election

The Demographic Headwind to Future Growth

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

1955 1965 1975 1985 1995 2005 2015 2025

Prime-Age (25-54) Population Growth, 1955-2026Percent Change, Annual Rate (Ten-Year Trailing Average)

Source: Social Security Administration; author’s calculations.

The Worldwide Productivity Slowdown is Not

Helping, Either

Source: Conference Board, Total Economy Database; author’s calculations.

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

UnitedStates

Japan Canada Germany France UnitedKingdom

Italy

1996-2006 2006-2016

Labor Productivity Growth, G-7 CountriesPercent, Annual Rate

The Base Case for Potential Growth

No. of Years: 54 10

History Forecast

1953 to 2007 2016 to 2026

Population 1.4 0.8

Potential labor force participation rate 0.2 -0.4

Potential real output per hour (productivity) 2.1 1.7

Other -0.5 -0.3

Potential real GDP 3.3 1.8

CBO: Selected Components of Potential Real GDP Growth, 1953-2026

Growth Rate, Percentage

Points at Annual RateComponent

Source: Congressional Budget Office; author’s calculations.

Alternative Scenarios For U.S. Potential Growth

5th Percentile:

0.7%95th Percentile:

3.0%

Median: 1.8%

Source: Bureau of Labor Statistics; Congressional Budget Office; author’s calculations.

Top 1% Share Has Risen Further and Faster in the

United States

Source: World Wealth and Income Database; author's calculations.

2015

0

4

8

12

16

20

24

28

1975 1980 1985 1990 1995 2000 2005 2010 2015

Canada FranceGermany ItalyJapan SwedenUnited Kingdom United States

Share of Income Earned by Top 1 Percent, 1975-2015Percent

Taxes and Transfers Have Played a Bigger Role In

Reducing Top 1% Inequality in the United States…

Source: Congressional Budget Office (2016); CEA calculations.

Inequality Compounded by Continued Decline in

Labor Force Participation for Prime Age Workers

Source: Bureau of Labor Statistics, Current Population Survey; author’s calculations.

May -17

1948-2007 Trend

86

88

90

92

94

96

98

100

1950 1960 1970 1980 1990 2000 2010

Prime-Age Male Labor Force Participation RatePercent

1948-2007 Trend

May -17

2000-2007 Trend

30

40

50

60

70

80

90

100

1950 1960 1970 1980 1990 2000 2010

Prime-Age Female Labor Force Participation RatePercent

The Decline Has Been Larger than Almost Any

Other OECD Country

Source: Organisation for Economic Co-operation and Development; author’s calculations

Change in Labor Force Participation Rates Across the OECD,

1990-2015

-8

-6

-4

-2

0

2

4

Italy

Unite

d S

tate

s

Est

onia

Tur

key

Denm

ark

Kore

a

Fin

land

Norw

ay

Fra

nce

Unite

d K

ingdom

Aust

ralia

Belg

ium

Port

uga

l

Canada

Japan

Irel

and

Isra

el

Spain

Sw

eden

Neth

erla

nds

Gre

ece

New

Zeala

nd

Luxe

mbourg

Germ

any

Prime-Age Male Percentage Point Change

-10

0

10

20

30

40

Est

onia

Denm

ark

Fin

land

Sw

eden

Unite

d S

tate

s

Tur

key

Norw

ay

Canada

Unite

d K

ingdom

Aust

ralia

New

Zeala

nd

Fra

nce

Japan

Kore

a

Italy

Isra

el

Port

uga

l

Germ

any

Belg

ium

Neth

erla

nds

Gre

ece

Irel

and

Luxe

mbourg

Spain

Prime-Age Female Percentage Point Change

Putting the United States Toward the Bottom of the

OECD in Prime Age Labor Force Participation

Source: Organisation for Economic Co-operation and Development.

Labor Force Participation Rates Across the OECD, 2015

0

20

40

60

80

100

Tu

rkey

Ko

rea

Ita

lyIr

ela

nd

United S

tate

sJap

an

Au

str

alia

Gre

ece

Isra

el

New

Ze

ala

nd

United K

ingdom

Be

lgiu

mLatv

iaLuxem

bourg

Canada

Sp

ain

Neth

erla

nds

Ge

rma

ny

Esto

nia

Fra

nce

Denm

ark

Fin

lan

dN

orw

ay

Po

lan

dS

lovak R

epublic

Po

rtuga

lS

lovenia

Au

str

iaH

ungary

Chile

Sw

eden

Me

xic

oIc

ela

nd

Cze

ch R

epublic

Sw

itzerlan

d

Prime-Age Female Percent

0

20

40

60

80

100

Isra

el

Italy

United S

tate

sN

orw

ay

Fin

lan

dIr

ela

nd

Be

lgiu

mA

ustr

alia

Tu

rkey

Po

lan

dLatv

iaD

enm

ark

Canada

Ko

rea

Au

str

iaP

ort

uga

lU

nited K

ingdom

Chile

Hungary

Neth

erla

nds

New

Ze

ala

nd

Esto

nia

Fra

nce

Germ

any

Sp

ain

Slo

venia

Gre

ece

Sw

eden

Slo

vak R

epublic

Icela

nd

Luxem

bourg

Me

xic

oC

ze

ch R

epublic

Jap

an

Sw

itzerlan

d

Prime-Age Male Percent

Slower Productivity, Rising Inequality, and

Declining Participation Have Combined to Slow

Median Income Growth

Source: Census Bureau; author's calculations.

25,000

50,000

100,000

1948 1958 1968 1978 1988 1998 2008

Real Median Family Income, 1948-20152015 Dollars (Log Scale)

1948-1973: 3.0%/yr

1973-2015: 0.4%/yr

The Policy Agenda

1. Fiscal Policy

a) Tax Policy

b) Infrastructure

c) Other fiscal changes

d) Fiscal trajectory

2. Regulation

3. Immigration

4. Trade

5. International Cooperation

Tax Policy

Tax cuts or tax reform?

Tax Policy

Current LawPresident’s Principles

House Republicans

Corporate Rate 35% 15% 20%

Expensing / No interest Deduction

Border Adjustment

Top Individual Rate 39.6% 35% 33%

Broader Base Some More

Cost ~$5.5 trillion Goal is $0

Share Top 1% ~33%+ 99%

Deficit-Increasing Tax Cuts Could Hurt Long-Run

Growth

Note: Based on medium elasticities scenario.

Source: Nunns et al. (2016); author's calculations.

2040

-8

-6

-4

-2

0

2

2015 2020 2025 2030 2035 2040

Change in Real GDP Under Trump Campaign Tax PlanPercent Change from Baseline

Infrastructure Proposal: Short-run Increases

Followed By Long-term Reductions

Source: Office of Management and Budget (2017).

2027

-30

-20

-10

0

10

20

30

40

50

President's FY 2018 Budget: Change in Infrastructure

Spending Relative to Baseline by Fiscal YearBillions of Dollars

Other Budget Policies

• 8 percent increase in defense spending in FY 2018

• 13 percent decrease in non-defense spending in FY 2018

– 11 percent cut in National Science Foundation

– 22 percent cut to the National Institutes of Health, including 19 percent

cut for cancer research

– 23 percent cut in financial aid for college

– 34 percent cut to training and employment programs

• $2.5 trillion decrease to low- and moderate-income

programs over ten years, 15 percent reduction

• Repeal/replace of the Affordable Care Act—including

health reductions to pay for high-income tax cuts

Overall Fiscal Outlook Under Current Law and the

President’s Policies

Source: Congressional Budget Office; Office of Management and Budget; Tax Policy Center; Committee for a Responsible Federal Budget; author's calculations.

CBO Baseline

CBO Baseline + President's FY 2018

Budget

CBO Baseline + President's FY 2018 Budget + President's Tax Plan

FY 2027

0

1

2

3

4

5

6

2017 2019 2021 2023 2025 2027

Federal Deficit as a Percent of GDP, FY 2017 - FY 2027Percent of GDP

Regulation

• The Trump Administration has expressed interest in reducing regulation across a number of sectors: e.g. banking, health care, energy markets, labor markets

• Effects of deregulation on growth are likely to be small– One estimate is that full repeal of Dodd-Frank would add 0.06

p.p. to annual growth rate (Holtz-Eakin 2015)—effects of partial repeal are smaller

• Growth effects of deregulation also limited because of less control over State and local regulation

• In most likely case, deregulation could add at most 0.1 p.p. to growth rate

Immigration

• Restrictions on legal immigration and increased

uncertainty for unauthorized immigrants would harm

growth:

– RAISE Act (Sens. Cotton and Purdue) would cut

legal immigration in half after a decade

– Implies reduction in annual growth rate of 0.2 p.p.

over next decade

President Trump Has Not Followed Through on

Campaign Promises for a 45% Tariff on China and

a 35% Tariff on Mexico…

Source: Census Bureau; Bureau of Economic Analysis; author’s calculations.

0

5

10

15

20

1929 1939 1949 1959 1969 1979 1989 1999 2009 2019

Effective Import Tariff RatePercent

With 45% Tariff on Imports from China and 35% Tariff on Imports

from Mexico

…But There Has Been a Significant Increase in

Import Restrictions in the First 100 Days

Source: World Bank TTB database; ComTrade (WITS); Chad Bown (2017).

Total

China

Non-China

2017

0

2

4

6

8

10

12

14

1995 2000 2005 2010 2015 2020

Share of U.S. Imports Covered by Barriers Imposed under Trade Laws, Including Projection for

Trump’s First "100 Days"Percent

Trump Effect? Projected

coverage of"100 days"

actions

Change in U.S. Multilateral Role

Source: openclipart.org.

In Conclusion

• U.S. economy at/near full employment. Wage growth is

lower than desired largely because of slow productivity

growth.

• The outlook is for growth ~2%. This assumes

unfavorable demography continues and productivity

bounces back somewhat.

• Inequality and labor force participation compound low

productivity growth, leading to slow income growth.

• President Trump’s policy agenda could hurt growth

further—and promote greater inequality of incomes.

The Outlook for the U.S. Economy and

the Policies of the New President

Jason FurmanSenior Fellow, PIIE

Peterson Institute for International Economics | 1750 Massachusetts Ave., NW | Washington, DC 20036

SNS/SHOF Finance Panel

Stockholm

June 12, 2017