6 Reasons The U.S. Economy Is Thriving, According To Star Economist Todd BuchholzTodd Buchholz
Americans are grappling with rapid technological change and growing political turmoil. But the U.S. is also in the midst of a golden age of prosperity, said Todd Buchholz, a former White House economic adviser, Harvard professor and managing director at hedge fund juggernaut Tiger Management, at The Channel Company’s 2019 Best of Breed (BoB) Conference.
A combination of low inflation, low interest rates and oil prices that aren’t too high are benefiting the economy, Buchholz said. And although President Donald Trump’s trade war with China is a potential risk, Buchholz said that his forecast for the larger economy is “fairly optimistic.”
Here are six reasons Buchholz has a rosy economic outlook.
6. Interest rates are low
The Federal Reserve Board cut interest rates nearly to zero. Interest rates are still scraping by. Last year, the Fed thought it would tighten interest rates a little bit and now it’s cutting them a little bit again. Many of my friends, especially my Republican friends, thought the Fed’s policy going back to Ben Bernanke, Janet Yellen, Jay Powell would be a disaster. These low interest rates would create hyper-inflation. I’m still waiting for that. Oh, the U.S. dollar, they said, was going to fritter away to nothing. The dollar is strong, not weak.
5. The price of energy isn’t high
It’s not just the Federal Reserve Board that slashed interest rates to near zero. [It’s] every central bank in the world. Our friends who said it was going to be a disaster said it would take us back to the ’70s. Remember the ’70s? Jimmy Carter? The term in the ’70s was ‘stagflation,’ a recession that just wouldn’t end, combined with raging inflation. I’m sorry, I don’t see inflation.
4. The Gig economy’s inflation check
Amazon has helped keep prices down. We have price wars going on everywhere. Just last week, Charles Schwab announced no more fees on trades. Amazon bought Whole Foods. The joke was that Whole Foods was Whole Paycheck because you had to use your whole paycheck to afford an apple and a steak. Honestly, I went into Whole Foods the other day and I thought the prices were reasonable compared to Shop Rite or Vons or so on and so forth. We still have price wars going on. Why else is inflation low? This remains the big mystery in economics: How can inflation be low with interest rates so low and the unemployment rate at 3.5 percent? The supply side shock of the Gig economy is a big part of it. Don’t you think it’s hard for hotel companies and car companies to raise prices when technology is allowing all sorts of resources that live offline to be shoved online? It’s like you’re trying to sell furniture and suddenly all these chairs that didn’t exist or didn’t seem to exist and they’re shoved on the stage or shoved online. That’s what’s happening across the economy. There is a shock of new supply, equipment, capital, labor, machinery. Airbnb has effectively added 25 percent to the number of hotel rooms in the country.
3. U.S. dollar’s strength
The strong dollar contains inflation … foreign tourists can’t afford to come to New York because the U.S. dollar has been so strong. When the U.S. dollar is strong, it makes foreign stuff look cheap to American consumers and it makes it more difficult for U.S.-based companies to raise prices on U.S. consumers or on foreign consumers. So this helps to contain inflation as well.
2. ‘The American consumer is in pretty good shape’
The economic recovery has pretty much been led by autos and iPhones. … For all the talk we’ve heard for months now about the U.S. going into a recession, we’re not. The American consumer is in pretty good shape because the unemployment rate is at 3.5 percent and wages are going up. I want you to monitor this because I could be wrong. Keep an eye on Capital One Financial Group. Capital One, like all credit card issues, is required to report delinquencies, how many people fail to pay on time. When that happens, it’s an effective precursor for a recession. It shows up in the share price of Capital One. But basically it hasn’t been very interesting the last year because that matters in showing whether the consumer has the health to keep the economy going.
1. Tax reform and the rest of the world
The tax cut was massive. If you take earnings and tax them at 21 percent instead of 35 percent, you’ve got a substantial change in after-tax earnings. Seventy-four percent of companies beat earnings expectations and with the U.S. Treasury at 1.6 [percent] or 1.7 percent today, what else are people going to do with their money but to put it in the equity market? So the real question here is whether inflation will continue to stay low. If inflation stays extremely low, interest rates will stay extremely low and that makes it more attractive for people to buy stock. It also reveals the dirty secret of the U.S. economy. The dirty secret of the U.S. economy is this: In a weird temporary situation, we are benefiting from the economic recession across the rest of the world. Because the rest of the world is in a recession, interest rates across the world are near zero. Because interest rates are near zero, Americans can get car loans for just over zero, Americans can get mortgages for their homes at 3 [percent] or 4 percent. Bankers are able to offer financing at lower rates. This has benefited the U.S. economy. Canada, Mexico and U.S. are doing fine. The rest of the world is just kind of floundering around.