REF 2020: UCLA Prof Stresses the Positives

RAILWAY AGE AT REF 2020, LA QUINTA, CALIFORNIA: Lee Ohanian, Professor of Economics at UCLA, gave a cautiously optimistic keynote address to the 350-plus attendees at the 34th annual Rail Equipment Finance Conference. Following are several key takeaways:

• U.S. GDP has been growing at a 2.6% annualized rate since 2016. Current economic performance represents growth, in terms of both employment and productivity. The U.S. has the lowest unemployment rate in 50 years of 3.6%. More than 80% of “prime age” workers (ages 25-54) are employed, near an all-time peak. Higher productivity growth may be a game changer. It’s growing faster because of investments, worker skills, capital formation, innovation and product development, with expectations of stable and higher after-tax returns. The current economic environment is consistent with this expectation.
• Business investment in plant and equipment and software is growing at 4.5% per year since late 2016, compared to just 1.2% in the prior decade. This investment is raising productivity growth by increasing capital per worker.
• Tax changes: The statutory corporate tax rate cut to 21% was necessary for the U.S. to be competitive globally. Deregulation has also helped, with deregulatory actions exceeding new regulations by 14 to 1 since late 2006.
• Trade and tariff issues have improved. Several China and U.S. trade problems have been resolved. The “Phase One” deal signed with China addresses trade, intellectual property, dispute resolution and technology transfer. The USMCA (U.S.-Mexico-Canada Agreement) includes IP (intellectual property) protection, motor vehicles, dairy product, aluminum and steel updates to NAFTA, which USMCA replaces.
• Short-run economic risks include the Corona Virus, but its severity must be put into perspective. The fatality rate is 2%, compared to SARS (2003-2004) of 10% and MERS (2014-2015) of 30%. Put into perspective, there are more than 30 million U.S. cases of influenza annually per the CDC, with 400,000 hospitalizations and 40,000 deaths. Corona vaccines are being tested. The Dow is down 14%, experiencing its worst week since 2008, but this is an over-reaction. Interest rates are down, but that’s temporary.
• Longer-run risks to the economy include the current Fiscal Year deficit of $1 trillion, 4.5% of GDP, a first-time high without recession or war. The deficit is an expenditure issue:  Federal revenues are stable but expenditures have increased. Publicly held debt as a share of GDP has doubled since the Great Recession. Federal spending is 22% of GDP. The major rising category is transfer payments (Social Security, Medicare, Medicaid, SNAP), which are 11% of the federal budget, compared to 7.6% in 2000.
• Longer-term, China’s growth is slowing. Research shows China’s underlying growth is probably closer to 4% than 6%. Local (provincial) government officials have been incentivized to overstate growth and productivity figures. This needs to change.
• Federal Reserve, inflation and interest rates have been stable. But the manufacturing output rate is flat.
• Economic performance is a powerful predictor for Presidential elections, which would indicate that Donald Trump will be re-elected. But these are not typical times. Questions: Will the economy remain strong? Will voters agree to potentially expensive programs, higher taxes and slower growth under a Democrat?
• Longer term, we need to address government spending. GDP growth can and should continue at 2.4%.

Rail freight traffic has historically been considered a reliable barometer of the economy. Given that traffic fell significantly in 2019 and is still trending down, is this a sign that the U.S. economy is headed toward recession? No, in Ohanian’s opinion. “As the economy becomes more service-oriented percentage-wise, railroads and what they carry are becoming somewhat less important as an economic measurement,” he noted.