Larry Kudlow is right: with an economy this good, there’s no chance investors will be distracted by the political drama in Washington—even if that drama includes the conviction of the President’s campaign manager and personal lawyer on corruption charges. While Wall Street is placing too high a probability on political gridlock being the result of November’s election, there is certainly no reason to panic quite yet that Trump-GOP corruption scandals will deflate what is arguably the best economy in twenty years.
Just how good is today’s economy? If you look at statistics like GDP growth, productivity growth, and corporate investment, the answer is somewhere between good to very good. GDP growth in the second quarter of 4.1% was very strong—a rate only matched a couple of times since the Great Recession. But it’s unlikely full-year growth will pierce the 3% mark, and in the coming years, there’s every reason to believe it will slow to the U.S.’s potential rate of roughly 2%. Corporate investment and worker productivity are showing signs of life, but these trends are still nothing to write home about yet. The data that do justify near-Trumpian levels of optimism about the economy today are those that describe the health of the U.S. consumer.
Target CEO Brian Cornell has been so impressed with the willingness of Americans to open their wallets that he called today’s consumer environment “the best I’ve seen in my career.” And Target’s not alone: retail sales in the U.S. are growing at rates unheard of just a few quarters ago. Survey data agrees, with Conference Board numbers showing that the U.S. consumer is more confident today about the economy than in the fifteen-year history of the poll. It’s not a statistic we can easily ignore. Consumer confidence tracks very closely with the unemployment rate—that it’s at an all-time high while unemployment is at historic lows argues against the idea that the job market is shakier than the headline unemployment rate suggests.
In other words: if American consumers say everything is okay, who’s to tell them that it's not? I have no interest in raining on any parades, but anyone with money in the market, or an interest in the future of the American economy should always be willing to question the wisdom of the crowd. Let’s not forget that consumer confidence levels today are roughly where they were in January of 2007, after the real estate bubble was beginning to deflate, and 18 months before the start of the Great Recession. Consumer confidence is a great leading indicator for the short term but it tells us nothing about where the economy will be a year or two from now.
Another question posed by these number is whether fears about a decades-long deterioration in the labor market brought on by automation technology are warranted. If the robots are coming for all of our jobs, then how do you explain a sub-4% unemployment rate and consumers who feel confident enough to spend like drunken sailors? For one, there is already extensive evidence that automation technology is a driving force behind wage stagnation and the hollowing out of local economies across the United States. As Former Treasury Secretary Larry Summers told me in an interview last summer, “This question of technology leading to a reduction in demand for labor is not some hypothetical prospect ... It's one of the defining trends that has shaped the economy and society for the last 40 years."
When the next recession comes, corporations are going to be in a great position to do more with less. Yes, the economy is good enough now for workers to be in high demand, but how long will this last? A few years ago, this chart comparing the recoveries of the labor market following each recession going back to 1948 was in wide circulation. It shows that as time goes on, the number of months it takes for the economy to regain the number of jobs it had at the start of the recession is growing exponentially. It seems obvious that this trend, which spans numerous presidential administrations and drastic changes to economic policy, is related to the growing ability of corporations to make a lot of money with not many workers. There’s no reason to think that this trend will reverse any time soon.
The American consumer is in a good mood now, and only an independently wealthy sadist would hope for the party to end. But the outlook of the average American is not a great indicator of the overall health of the economy, and when the economy does take a turn for the worse, he will find that his optimism today was overblown.