Trump’s Growth Dream and the Harsh Reality

Ever since Trump’s election and he and Treasury Secretary Steven Mnuchin uttered the stupidest words ever, I’ve been explaining in every place I can why 4%-plus growth is NOT sustainable… not past the tax-cut gravy train that hit mostly this year.

Ultimately, it mostly comes down to two predictable demographic factors…

As I’ve ALWAYS said, the most important driver of our economy isn’t the president or the Fed or anything other than people!

It all boils down to what people predictably like to spend their money on as they age!

Those two demographic factors making sustainable 4% growth nothing more than Trump’s wet dream are…

• Workforce growth is slightly negative and overall flat for the coming decade and growing at 0.2% max for decades ahead, and…

• Productivity has fallen from 3% in 2000 to 0.5% currently and will fall to zero or slightly negative as Baby Boomers continue to age.

That’s what largely drives GDP growth: demographic growth plus productivity gains.

Growth between 0.0% and 0.5% would be the reality and 1% a year would be a stretch at this point without never-ending free money and tax cuts.

And I don’t expect this year’s higher growth rates to last!

We’ve still averaged closer to 2% real GDP growth since 2009, despite the most massive monetary and fiscal stimulus in history.

Even Obama had some 4% quarters. They didn’t last either.

But here’s the final blow…

The average worker peaked in spending (and likely in income) in 2007, exactly as we forecast from the hard facts we found in the annual Consumer Expenditure Survey from The Bureau of Labor. That was simply a 46-year lag on the birth index adjusted for immigration.

Now I’ve come across good data from PayScale on how much the upper crust – full-time college graduates – earn. These people obviously earn more and peak in their spending much later.

PayScale also breaks the data out by gender. That turns out to be quite important…

Look at this chart. 

Women peak at $62,100 at age 55/56 and have a long plateau between age 43 at $61,600 and 57 at $62,000. Then their wages fall off substantially into retirement.

Men continue to climb into a much higher peak of $94,800 at age 56, with a plateau between $94,500 at age 53 and $94,700 at age 57.

That’s 53% higher for men than women at their peak!

Then they drop off more dramatically after 57.

Hence, age 57 is the real effective pay peak before falling for this full-time elite college group.

Why Is This Important? 

A 57-year lag for peak spending of college grads would have 2018 as the last year of strong earning and spending before this most affluent group begins their decline… 11 years after Homer Simpson did into 2007. 

The top 20% in this country account for almost all the wealth and 50% of the spending…

Now that they’re about to sharply slow their spending, the Donald’s not going to see the curve ball coming any more than Bush and the Fed saw the slowdown in 2008!

The slowdown between age 57 and 58 – just one year – is 2% in earnings.

At 50% of spending and 70% of GDP, that would knock GDP down 0.7% in 2019. Just this one factor.

Note that if we average men and women, the peak for these college grads is age 56 at $78,450, holding up at $78,350 at 57 before dropping off.

But the peak for a dual income full-time college couple would be a whopping $156,900. That’s about 2.3 times that for an average household.

PayScale also settles another big issue: gender inequality in pay.

Yes, women earn only 77.9% of what men do for full-time work on average…

BUT…

Most of that difference comes from the jobs women tend to naturally choose. 

When comparing income in the same occupations, women earn 97.8% of what men earn – just 2.2% lower.

Men focus more on hard sciences and jobs like software developers and engineers. No wonder Silicon Valley is such a male-dominated culture!

Women focus more on jobs like teachers, nurses, and social workers – they like helping people.

Regardless, women accelerate as fast up the career chain – if not faster – than men do up until age 29. Then they start having kids. We estimate the women in more affluent households have the average kid when they’re about 30 years old. For the average household, that age is 28 for the average one.

The pay gap for ages 20 to 29 is 81.8%. It falls to 76.7% for 30 to 44, and 69.5% for 45-plus.

Women are five times more likely to take leave for childrearing than men and the average leave of one year knocks 7.3% off income when they’re re-hired or return to the work force.

They simply lose momentum in the race for success.

I recall a survey many years ago that showed that in law firms, women who didn’t have kids did just as well as the men.

The gap is a bit different by major industries…

The largest for same occupation is in oil and gas drilling – an obviously macho industry – at 7.4% lower for women.

For transportation and warehousing (think truckers) it is 4.9%. I’d hate to see it for lumber jacks.

For technology, it’s only 0.8%.

And for education, it’s the lowest at 0.6%.

All of which is to say that the promise of sustainable 4% growth is now even less deliverable than it ever was… and it didn’t have a chance in hell to begin with.

That’s why it always pays to know the real facts. Unfortunately, economists and our politicians DON’T! But if YOU do, then you’ll be many steps ahead.