Date of this Version
Business in Nebraska, Volume 71, No. 717, December 2016
Over the last few years the service sector has been the primary engine of economic growth in the United States. Supported by growth in employment and real wages, the service sector has grown steadily with increases in retail trade, business services, personal services and construction activity. Growth has been limited, however, in the industrial sector, given weakness in the energy industry, poor demand for business investment and weak overseas economies. The net result has been moderate economic growth.
Several fundamental issues continue to support an outlook for moderate economic growth. First, the pace of job growth will slow given the ongoing retirement of “baby boom” generation workers, and as the reserve of underutilized workers continues to shrink. Slower job growth will limit growth in consumer income and spending. Second, there will be slow growth in demand from overseas. Most developed economies face the same demographic challenges as the United States, while many developing countries face a need for structural reforms. China, for example, must continue to reign in its excess spending on infrastructure and housing.
Domestic public policy, however, may provide a change to the outlook. The incoming Trump Administration has shown an interest in tax reform and in reducing environmental, labor market and financial regulations. These policies are positives for economic growth. For example, tax reform and deregulation can stimulate business investment.
At the same time, plans to cut taxes do not appear to be matched with plans for significant spending reductions, which can limit the effectiveness of the tax cuts. Plans to increase spending on infrastructure and the military, in particular, have an unknown influence on growth. Finally, policies to limit international trade and legal immigration, if implemented on a large scale, would be negative for economic growth. Overall, the planned policies are a mixed bag for the economy and the extent and manner with which each of these policies will be implemented is not yet known.