Trump will exacerbate a structurally weak economy, says LGIM
At Legal & General Investment Management (LGIM)’s November Fundamentals, Global Economist James Carrick (photo) addresses the structural problems undermining US growth and considers the economic implications of a Trump presidency.
“Federal Reserve (Fed) chair Janet Yellen thinks there is plenty of scope to grow the US economy faster without increasing inflation, but we disagree,” James says.
“While the US economy has grown by an average of 3% in the past 50 years, there is a stark difference between growth in the last decade (1.5%) and the previous four decades (3.25%). We believe this slowdown reflects structural rather than cyclical factors. And demographics – not policies – are largely to blame.”
Demographics affect GDP growth in two ways: the number of people willing to work and their productivity. As people age they are less likely to work, particularly as they approach ‘retirement’ age. Moreover, research suggests most people’s productivity peaks in their late 30s. So a very young or very old population is less productive than a middle-aged one.
The US birth rate peaked in the late-1950s with the Baby Boomers. These workers are now in their late 50s and their productivity is declining, bringing down the average.
“Ironically, the growth in the labour force is now driven entirely by immigration,” James says. “This is a political hot potato and one that has underpinned Trump’s campaign.”
“Despite the tight labour market, Yellen believes there is still ample slack in the US economy. In particular, she has indicated there are many ‘discouraged’ workers who can re-enter the labour market, as well as part-time workers who would prefer to work full time.”
“However, we worry the US economy is running out of slack – particularly if the President-elect delivers on his promise to halt immigration.”
“When the labour market tightens and wages begin to rise, marginal workers are drawn back into the labour force. While this extends the length of the economic cycle, our analysis suggests these marginal workers don’t prevent wages from picking up. Instead, they are a symptom of rising wage inflation.”
“By end-2017, we foresee a tight US labour market pushing up core inflation. The Fed will then be caught between trying to raise rates to dampen inflation without wishing to squeeze the indebted corporate sector too much.”
“Just as baby boomers are reaching the end of their working lives, this economic cycle is also getting close to the end.”
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Legal & General Investment Management
Legal & General Investment Management is one of Europe’s largest asset managers and a major global investor, with total assets of £853 billion*. We work with a wide range of global clients, including pension schemes, sovereign wealth funds, fund distributors and retail investors.
Throughout the past 40 years we have built our business through understanding what matters most to our clients and transforming this insight into valuable, accessible investment products and solutions. We provide investment expertise across the full spectrum of asset classes including fixed income, equities, commercial property and cash. Our capabilities range from index-tracking and active strategies to liquidity management and liability-based risk management solutions.
* LGIM internal data as at 30 June 2016. These figures include assets managed by LGIMA, an SEC Registered Investment Advisor. Data includes derivative positions and advisory assets.