The Next President Inherits a Remarkable Economy
Wall Street Journal
By Greg Ip
Oct. 31, 2024 5:30 am ET
Whoever wins the White House next week will take office with no shortage of challenges, but at least one huge asset: an economy that is putting its peers to shame.
With another solid performance in the third quarter, the U.S. has grown 2.7% over the past year. It is outrunning every other major developed economy, not to mention its own historical growth rate.
More impressive than the rate of growth is its quality. This growth didn’t come solely from using up finite supplies of labor and other resources, which could fuel inflation. Instead, it came from making people and businesses more productive.
This combination, if sustained, will be a wind at the back of the next president. Three of the past four newcomers to the White House took office in or around a recession (the exception was Donald Trump, in 2017), which consumed much of their first-term agenda. The next president should be free of that burden.
Meanwhile, higher productivity growth should make the economy a bit less prone to inflation, more capable of sustaining budget deficits, and more likely to deliver strong wages. All would be a boon to President Trump or President Kamala Harris.
To describe this economy as remarkable would strike most Americans as confusing, if not insulting. In the latest WSJ poll, 62% of respondents rated the economy as “not so good” or “poor,” which explains the lack of any political dividend for President Biden. There are many reasons for the disconnect, most important the high inflation of 2021-23, whose effects still linger.
When you’re unhappy at home, you can gain some perspective by checking in on your neighbors. The whole world has been through the wringer since 2020; any country’s performance alone is less revealing than how it compares with its peers.
Most leaders from around the world would trade their economies for the U.S.’s in a heartbeat. Through the second quarter, the U.S. grew 3%; none of the world’s next six largest advanced economies grew more than 1%. Even China is struggling.
Sometimes strong growth is a prelude to a recession because it comes from straining the economy’s capacity, generating inflation and forcing the Federal Reserve to raise rates.
Yet inflation has fallen in the past year, to 2.7% in the third quarter, using the Fed’s preferred underlying measure. That’s still above the Fed’s 2% target, but the progress was sufficient for the Fed to cut rates in September and pencil in more cuts—all without growth flagging.
“That’s pretty impressive. That’s a bit of a Goldilocks outcome,” Robin Vince, chief executive of BNY, said in a recent interview. “A year, two years ago, very few commentators actually thought that was going to be possible.”
Some of that growth was due to the labor force swelling with inflows of unauthorized migrants. Payroll employment was up 2.4 million in the year through the third quarter, or 1.6%. That, however, overstates the contribution of labor because on average each employee worked slightly less hours.
Adjusted for that, productivity—i.e., output per hour—probably rose 2% to 2.5% in the past year, well above the 1.5% average annual rate from 2007 to 2019.
Economic growth is unlikely to sustain its recent pace because migrant flows have already slowed. Yet thanks to higher productivity, the U.S.’s potential growth—what it can sustain over the long run—might be higher than the 1.8% that many forecasters like the Fed have long assumed.
Satyam Panday, an economist at S&P Global Ratings, thinks the potential might be 2% to 2.3%, citing booming investment in artificial intelligence, data centers, and renewable energy. “You have to pick your side,” said Panday. “We are techno optimists.”
Productivity is extremely volatile, especially since the pandemic, so it is too soon to say its trend has shifted. Still, one encouraging sign is that no other country has witnessed it.
The Bank for International Settlements, a Swiss-based umbrella group for central banks, calculates that from the end of 2019 to the end of 2023, total output rose 7.9% in the U.S., of which 1.2% came from more hours worked and 6.7% from productivity—more output per hour. In the eurozone, output was up 3% in the same period, entirely due to more hours.
“Productivity is really bad across the world,” said Hyun Song Shin, the BIS’s economic adviser. “The U.S. is an outlier.”
The BIS thinks inflation is a bigger risk globally in coming years because of threats to supply chains such as from geopolitical conflict. But productivity provides some cushion by enabling companies to absorb higher costs, such as wages. Shin said, “The U.S. can run the economy hot in a way others cannot.”
What’s behind the divergence? Read the recent report by former European Central Bank President Mario Draghi on European competitiveness. In explaining why Europe lags behind, it reveals why the U.S. leads.
One reason is the domestic energy supply, which insulated the U.S. from the surge in natural-gas prices that followed Russia’s invasion of Ukraine. European Union companies still pay two to three times more for electricity and four to five times more for natural gas than their U.S. counterparts, Draghi found.
More important is the role of technology. No EU company worth more than 100 billion euros, equivalent to $108 billion, “has been set up from scratch in the last 50 years,” while all six U.S. companies worth more than $1.08 trillion were created in this period, Draghi said. America’s companies are also faster to adopt technology such as artificial intelligence, which explains much higher productivity in professional services, finance, insurance, and information technology services.
These differences are mostly the product of the intrinsic dynamism of American capitalism rather than any president’s policies. Still, Trump and Biden, in their respective fiscal policies, both sought to boost business investment, a key ingredient to productivity: Trump, through lower taxes and regulations on corporations broadly, and Biden by directing federal dollars and tax credits to semiconductor manufacturing, low-carbon energy, and infrastructure.
If the economy is so good, why are Americans so glum? Lots of noneconomic reasons, I’ve argued. But no question, inflation looms large. Wages, from 2021 to 2023, didn’t keep up with inflation, as they are supposed to when productivity and economic growth are strong. Higher prices flowed disproportionately to profits rather than pay.
That has begun to change, though. Average wages since mid-2023 have outpaced inflation as the latter fell. Inflation could yet stall, or even rise; both nominees, and Trump in particular, have plans that could pressure prices. And surprises could interfere, like a big rise, or fall, in oil prices, another pandemic, or war.
Still, odds are inflation will be much closer to 2% in the next four years than in the past four. With time, anger at today’s higher prices will become acceptance. The next president is likely to bear much less of the burden of inflation than Biden did.
By Greg Ip
Oct. 31, 2024 5:30 am ET
Whoever wins the White House next week will take office with no shortage of challenges, but at least one huge asset: an economy that is putting its peers to shame.
With another solid performance in the third quarter, the U.S. has grown 2.7% over the past year. It is outrunning every other major developed economy, not to mention its own historical growth rate.
More impressive than the rate of growth is its quality. This growth didn’t come solely from using up finite supplies of labor and other resources, which could fuel inflation. Instead, it came from making people and businesses more productive.
This combination, if sustained, will be a wind at the back of the next president. Three of the past four newcomers to the White House took office in or around a recession (the exception was Donald Trump, in 2017), which consumed much of their first-term agenda. The next president should be free of that burden.
Meanwhile, higher productivity growth should make the economy a bit less prone to inflation, more capable of sustaining budget deficits, and more likely to deliver strong wages. All would be a boon to President Trump or President Kamala Harris.
To describe this economy as remarkable would strike most Americans as confusing, if not insulting. In the latest WSJ poll, 62% of respondents rated the economy as “not so good” or “poor,” which explains the lack of any political dividend for President Biden. There are many reasons for the disconnect, most important the high inflation of 2021-23, whose effects still linger.
When you’re unhappy at home, you can gain some perspective by checking in on your neighbors. The whole world has been through the wringer since 2020; any country’s performance alone is less revealing than how it compares with its peers.
Most leaders from around the world would trade their economies for the U.S.’s in a heartbeat. Through the second quarter, the U.S. grew 3%; none of the world’s next six largest advanced economies grew more than 1%. Even China is struggling.
Sometimes strong growth is a prelude to a recession because it comes from straining the economy’s capacity, generating inflation and forcing the Federal Reserve to raise rates.
Yet inflation has fallen in the past year, to 2.7% in the third quarter, using the Fed’s preferred underlying measure. That’s still above the Fed’s 2% target, but the progress was sufficient for the Fed to cut rates in September and pencil in more cuts—all without growth flagging.
“That’s pretty impressive. That’s a bit of a Goldilocks outcome,” Robin Vince, chief executive of BNY, said in a recent interview. “A year, two years ago, very few commentators actually thought that was going to be possible.”
Some of that growth was due to the labor force swelling with inflows of unauthorized migrants. Payroll employment was up 2.4 million in the year through the third quarter, or 1.6%. That, however, overstates the contribution of labor because on average each employee worked slightly less hours.
Adjusted for that, productivity—i.e., output per hour—probably rose 2% to 2.5% in the past year, well above the 1.5% average annual rate from 2007 to 2019.
Economic growth is unlikely to sustain its recent pace because migrant flows have already slowed. Yet thanks to higher productivity, the U.S.’s potential growth—what it can sustain over the long run—might be higher than the 1.8% that many forecasters like the Fed have long assumed.
Satyam Panday, an economist at S&P Global Ratings, thinks the potential might be 2% to 2.3%, citing booming investment in artificial intelligence, data centers, and renewable energy. “You have to pick your side,” said Panday. “We are techno optimists.”
Productivity is extremely volatile, especially since the pandemic, so it is too soon to say its trend has shifted. Still, one encouraging sign is that no other country has witnessed it.
The Bank for International Settlements, a Swiss-based umbrella group for central banks, calculates that from the end of 2019 to the end of 2023, total output rose 7.9% in the U.S., of which 1.2% came from more hours worked and 6.7% from productivity—more output per hour. In the eurozone, output was up 3% in the same period, entirely due to more hours.
“Productivity is really bad across the world,” said Hyun Song Shin, the BIS’s economic adviser. “The U.S. is an outlier.”
The BIS thinks inflation is a bigger risk globally in coming years because of threats to supply chains such as from geopolitical conflict. But productivity provides some cushion by enabling companies to absorb higher costs, such as wages. Shin said, “The U.S. can run the economy hot in a way others cannot.”
What’s behind the divergence? Read the recent report by former European Central Bank President Mario Draghi on European competitiveness. In explaining why Europe lags behind, it reveals why the U.S. leads.
One reason is the domestic energy supply, which insulated the U.S. from the surge in natural-gas prices that followed Russia’s invasion of Ukraine. European Union companies still pay two to three times more for electricity and four to five times more for natural gas than their U.S. counterparts, Draghi found.
More important is the role of technology. No EU company worth more than 100 billion euros, equivalent to $108 billion, “has been set up from scratch in the last 50 years,” while all six U.S. companies worth more than $1.08 trillion were created in this period, Draghi said. America’s companies are also faster to adopt technology such as artificial intelligence, which explains much higher productivity in professional services, finance, insurance, and information technology services.
These differences are mostly the product of the intrinsic dynamism of American capitalism rather than any president’s policies. Still, Trump and Biden, in their respective fiscal policies, both sought to boost business investment, a key ingredient to productivity: Trump, through lower taxes and regulations on corporations broadly, and Biden by directing federal dollars and tax credits to semiconductor manufacturing, low-carbon energy, and infrastructure.
If the economy is so good, why are Americans so glum? Lots of noneconomic reasons, I’ve argued. But no question, inflation looms large. Wages, from 2021 to 2023, didn’t keep up with inflation, as they are supposed to when productivity and economic growth are strong. Higher prices flowed disproportionately to profits rather than pay.
That has begun to change, though. Average wages since mid-2023 have outpaced inflation as the latter fell. Inflation could yet stall, or even rise; both nominees, and Trump in particular, have plans that could pressure prices. And surprises could interfere, like a big rise, or fall, in oil prices, another pandemic, or war.
Still, odds are inflation will be much closer to 2% in the next four years than in the past four. With time, anger at today’s higher prices will become acceptance. The next president is likely to bear much less of the burden of inflation than Biden did.
