The old joke holds that when you have two economists in a room, you’ll get three opinions.
A version of that story was on display Thursday during David Kelly’s presentation at the Morningstar ETF Conference in Chicago. In the opening keynote presentation on Wednesday afternoon, BlackRock’s Russ Koesterich listed wage stagnation as one of the three headwinds for the U.S. economy. Kelly, chief global strategist for J.P. Morgan Funds, drew a more optimistic conclusion from the jobs data. If unemployment continues to fall at its current rate, he pointed out, in a year’s time the U.S. will be nearly at full employment (from 6.2% now to the traditional full employment rate of 5%).
However, Kelly acknowledged that the U.S. recovery since the financial crisis has been “like an Irish summer: damp and disappointing.” The Irish native but now American citizen said that the average year-over-year GDP growth over the past 50 years has been 3%, but the current expansion has been running at only 2.2%.
Warming to his theme that “there’s far too much fortune telling going on in the investment industry,” rather than a focus on what actual economic conditions are, he suggested that not only the U.S. but the worldwide economy is in better shape than many perceive. He said “we’re seeing a lift in wages, finally,” noted that “the fiscal drag from Fed is over,” that the steep increase in U.S. energy production will help reduce the trade deficit, and that new vehicle sales are “back to the levels of the mid-2000s.”
There is even “some momentum in housing,” though for the “Irish summer” economy to flourish, housing “has to recover further.” So why is housing “still weak?” He blamed the combined efforts of the federal government and the Federal Reserve.
“The Fed has pushed down mortgage rates by buying up all the mortgages” through quantitative easing, “distorting the mortgage market” by pushing down rates to a level that is leading most banks to shy away from writing new mortgages. “We’re not building enough houses,” Kelly said, evidenced by a 17-year low in apartment vacancy rates in the second quarter of 2014.
There’s also a perception problem among Americans. “Ask most Americans if unemployment is higher than average or lower, and they’ll say higher,” despite the fact that over the last 50 years the average unemployment rate is 6.1%, and we’re now at 6.2%.
“Boomers are leaving the labor force in droves,” he said, which is the main factor driving down labor force participation. While 65 million people are hired yearly, 52 million are leaving their jobs each year.
Under current conditions, we “can do at best 0.5% growth in the labor force over the next 10 years, but since worker productivity has declined, he reiterated that “2% is the upper band of what we’ll achieve in growth over the long run.”
So, he asked, “Could we fix this? Yes.”
The solutions he recommends include corporate tax reform — “a flat 10% corporate tax rate would attract more companies to the U.S.,” which in turn would lead to a “productivity and capital boom in this country.” In addition, “we can do entitlement reform” on Medicare and Social Security to align those programs with increased life expectancy, and finally the government could implement immigration reform, pointing out that in no other country do so many people want to immigrate: 8 million applied to the lottery to get green cards last year, he said, and only 900,000 got them.
“Why wouldn’t we want so many” highly skilled and motivated immigrants, he asked, though he followed up by reminding his listeners that “it makes no sense to base an investment strategy on what Washington might do.”
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