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4% is not a magic number

| Posted by: Paul Donovan | Tags: Paul Donovan Weekly

The US grew at just over 4% (on an annualized basis) in the last quarter. That was the best growth since 2014. Could this be a "new normal"? Could US trend growth be 4%?

This is not likely.

Trend growth is a simple mix. Economists estimate how many people are working (population). They then add how much people do when they work (productivity). Those two factors make up trend growth.

The US labor force is not growing more quickly. The labor force growth rate has hovered around 1% for some time. Immigration is becoming more difficult in the US. People are also moving less and less often. This makes it harder to get the right person in the right job.

Productivity is difficult to forecast. But taxing trade is likely to make companies less efficient. This will hurt productivity. Tax cuts could help productivity if firms invest the money. But the growth of US investment in equipment has slowed this year. Personal tax cuts can help productivity if people invest the money in training and education. There is no sign of this.

US trend growth is not 4%. The US Federal Reserve policymakers estimate trend growth at 1.8%.