The Geo-demography of America’s NEW Economic Boom

As the Trends editors have previously proclaimed, “It’s morning In America again."  We’re now past the so-called “flash point” we spoke of in Ride the Wave.  Business, consumers and policy-makers can now see that the “institutional transformation” needed to realize the full potential of the Deployment Phase of the Fifth Techno-Economic revolution is headed for completion.  And economic decision-makers ranging from investors to managers and from employees to consumers are responding to evolving incentives.

Consider a few key metrics.

Small business owners are clearly on board.  According to Juanita Duggan, President and CEO of the  National Federation of Independent Business, “2017 was the most remarkable year in the 45-year history of the NFIB Optimism Index.  With a massive tax cut for 2018, accompanied by significant regulatory relief, we expect very strong growth, millions more jobs, and higher pay for Americans.”  NFIB Chief Economist Bill Dunkelberg said, "We’ve been doing this research for nearly half a century, longer than anyone else, and I’ve never seen anything like 2017.  The 2016 election was like a dam breaking. Small business owners were waiting for better policies from Washington, suddenly they got them, and the engine of the economy roared back to life."
 
Big business CEOs also see where things are going.  As J P Morgan CEO Jamie Dimon told Fox Business, “The economy is doing quite well.  4% economic growth this year is possible.”  Trump told CNBC he thinks the GDP will rise "much higher than that."  And meanwhile, overall growth is already at its highest in 13 years.

Consumers are also very upbeat.  As measured by the Conference Board, consumer confidence reached a 17-year high in November before falling slightly in December.  Consumers’ expectations remained at historically strong levels, suggesting strengthening economic growth will continue well into 2018.

A big part of this enthusiasm is due to U3 unemployment ending 2017 at the lowest level in more than 17 years and new unemployment claims ending at their lowest level since 1973.  And, while U6 unemployment ended 2017 at a stubbornly high 8.1%, that was down from 9.1% at the end of 2016.   

 
At the same time, investors show confidence as they steadily push the DJIA, NASDAQ, and S&P 500 to new all-time highs.  Notably, even as we extend the secular bull market that began in 2013, objective analysts don’t see signs of irrational exuberance that signify the top of a bubble.

The final stages of the required institutional transformation referred to earlier, were largely embedded in the policy shifts anticipated as soon as the 2016 election results were tallied.  The new tone with taxes, regulation, trade, and immigration reset expectations and unleashed the power of “creative destruction.”

But the de facto “civil war” raging across the United States arises in large part from the fact that the benefits of this transformation are changing the balance of wealth and power within the United States.  And, in that sense, the election of 2016 may be as consequential as the election of 1860.

While some of the positive institutional changes can be traced to the Obama years, there was clearly a shift in trajectory and direction of the economy beginning in 2017. As President Obama once noted, “elections have consequences.” Under Obama, federal policies including the 2009 “stimulus,” minimal regulation of tech giants, and ultra-low interest rates, tended to benefit urban core, blue-state bastions that now constitute the unshakeable base of the Democratic Party.  But, as our friend Joel Kotkin of the Center for Opportunity Urbanism observes, under Trump, more working-class and middle-class workers benefit from higher standard tax deductions and energy deregulation, while the affluent in high-tax states like California, New York, and Illinois are likely not to do as well.

Today, the often-disdained red states have the wind at their back, while in blue America, the economy seems to be slowing, as industries and people move to lower-cost, lower-regulation states.  Seven of the top 10 states in terms of population growth last year were deep red; overall, the South has become home to the better part of economic dynamism in the country, with Texas and Florida alone accounting for one-third of all U.S. growth since 2010.  Some analysts suggest that the new tax law, which works against high-income earners in high-tax states, will only accelerate these trends further.
 
The most recent employment numbers from the Bureau of Labor Statistics  confirm these trends.  Texas, as it has for the last few decades, is generating jobs at a higher rate than more populous California, lauded by the mainstream media as the premier anti-Trump economy.  In November, the largest job increases, averaging around 0.4 percent?occurred in three pro-Trump states: Iowa, South Carolina, and Texas.  At the same time, the biggest drops in unemployment have occurred in the South, led by Alabama, where the rate fell by over 2.5 percent, followed by Tennessee, Florida, and Georgia.  The BEA reports that the GDP of Texas, the linchpin of red America, grew almost three times as fast as California and five times as fast as New York, over the past year.  Utah, Michigan, and Wisconsin, also grew faster than California.

This marks a meaningful change in the geography of American economic vitality.  As recently as 2016, California’s estimated GDP growth was twice the national average, ranking among the highest in the nation; now it’s slowed 50 percent from 2016 levels, and its GDP expansion now ranks just 35th in the country.  This parallels the most recent BEA findings, where Texas, for example, is experiencing 50 percent faster growth than California.  In fact, among the top six states for income growth, all except Washington and Nevada (which Trump nearly won) went for Trump.

Today, the country’s fastest-expanding economies, at the state as well as the metro level, are in the South not the West.  Meanwhile, twenty of the 25 fastest-growing metro economies are in states that went for Trump in 2016, both in the South and in the Rust Belt.  The top three?Jacksonville, Des Moines, and Chattanooga?are all in the heart of Trump country.

To a large extent, these were the states already poised to surge, prior to the election.  However, it’s clear that Trump policies have encouraged sectors, notably manufacturing and energy development, that are particularly critical to red states.  Manufacturing is on a roll, with expansion within 16 of the 18 major sectors, according to the Institute for Supply Management.  Under Obama, manufacturing had begun a recovery, but by late 2016 that modest expansion was running out of steam.  Now things are turning around.  As of early December 2017, the country had added 138,000 manufacturing jobs, compared with 34,000 jobs lost during the same period the previous year.

Trump’s “America First” rhetoric may horrify the economic and cultural elites, but the pressure to locate plants here seems to be paying off.  Fiat’s plan to move production from Mexico to the Detroit suburbs, is expected to create 2,500 jobs there.  Toyota and Mazda have announced that they will locate a major new manufacturing plant in Huntsville, creating 4,000 jobs.  For Toyota, this will be its second assembly plant in Alabama.

Internationally, Trump might be personally unpopular, but foreign investors are upping their stakes in the U.S., particularly in the industrial sector, which has been booming.  The U.S. remains the preferred destination for foreign capital.  And these investments are having a bigger impact in Wisconsin, Alabama, Texas, and Michigan than in New York, California, or Massachusetts.  Some of the most precipitous drops in the numbers of highly paid blue-collar jobs since 1991 have been in blue states like California, New York, and Illinois.  This has been particularly notable in Los Angeles and in Cook County, Illinois, long the country’s leading industrial regions.

Today, manufacturing accounts for barely 5 percent of state employment in New York and 8 percent in California, weakening the focus on productive industry.  Meanwhile, manufacturing accounts for 16 percent of jobs in Wisconsin and more than 13 percent in both Michigan and Alabama.  So, these states see manufacturing jobs as a road to future prosperity.

No industry had more at stake in the 2016 election than energy.  Many of the Silicon Valley and Wall Street supporters of Green policies have been eager to capitalize on regulatory efforts to promote the demise of Big Oil.  Progressive pundits saw the 2016 election as their “last chance,” as one put it, to stop “climate-change catastrophe.”

As previously highlighted in Trends, the radicalized climate movement has sought to gut the fossil fuel industry and the economies built around it.  The progressive website Common Dreams, for example, proposes eliminating fossil fuels within five or six years, in order to assure a “reasonable margin of safety for the world.”  And Green-oriented politicians, like New York attorney general Eric Schneiderman and New York City mayor Bill de Blasio, continue to demonize fossil-fuel producers, along the lines of the tobacco industry.  In some cases, their lawsuits have been financed by Green-energy interests backed by the likes of San Francisco hedge-fund billionaire Tom Steyer.

Producing fossil fuels disgusts members of this progressive elite, but in a broad swath of the country?from Pennsylvania to the Texas “oil patch”?these resources provide tens of thousands of jobs.  In contrast, most blue states have little in the way of energy resources.  Those that do, notably California (which has the nation’s fifth-largest oil reserves) as well as New York, seem determined to shame and regulate the industry out of existence.

Energy’s regional economic stimulus was already clear before the Saudi’s drove the decline in oil prices beginning in 2014.  For much of the past decade, energy-friendly states enjoyed a gusher of jobs, many providing high-wage employment, averaging about $100,000 annually; that exceeds compensation in information technology, professional services, or manufacturing.  Due largely to energy revenues, states such as Texas, Oklahoma, and North Dakota have enjoyed their best jobs numbers and were among the first states to gain back all the jobs they lost during the Great Recession.

The energy industry also matters in the critically important Midwest.  Local natural gas development promotes the startup of new electrical plants, critical to replacing coal and reducing emissions.  Lower electricity costs have provided American manufacturers an energy-price advantage over European and Asian firms; meanwhile, German electricity prices are almost three times the average for the United States, as a result of Green energy policies.  If Hillary Clinton had won, her embrace of anti-fossil-fuel ideology could have had a catastrophic impact on many Midwest states that rely heavily on coal for electricity, such as Iowa, Kansas, Ohio, Illinois, Minnesota, and Indiana.  Not surprisingly, much of the opposition to the Obama EPA’s decrees came from heartland states such as Oklahoma, Indiana, and Michigan.

With Trump’s rollback of these mandates, energy jobs, after a two-year decline, are again on the upswing, with 50,000 new positions created, so far.  North Dakota, Texas, and Oklahoma have all benefited.  Some economists project upward of 900,000 new high-paid and largely blue-collar jobs over the next eight years.  Assuming that the industry is not strangled by political or ideological dynamics, the American Petroleum Institute predicts that, by 2035, the energy sector will produce around 1.9 million new jobs.

Given this trend, we offer the following forecasts for your consideration.

First, because of demographic factors, the current boom will do more to address the concerns of the bottom 60% than the secular boom that occurred from 1982 to 1999 or the transitional phase from 2000 to 2016.

Current policies are already restoring America’s working and middle classes, who have been struggling from decades of relative decline.  High school graduates and minorities, languishing during Obama’s blue-state boom, see their wages now bumping up faster than those of managers and professionals.  Since Trump’s election, wages for the bottom half of the wage pool have grown faster for all blue-collar workers.  Black unemployment is now at an historical low, and minority incomes are on the rise, after a disappointing run in the Obama years.  Opportunities are opening up even for convicted felons.

Second, the return to a stronger grassroots economy in “red America” will help bridge the national wealth gap.

As progressive economist James Galbraith notes, Trump states tends to be more egalitarian, than Clinton states, which exhibit far more inequality in their deindustrialized economic structures.  Therefore, economic expansion in Kansas City, Grand Rapids, or Houston means something different than in Silicon Valley, where gains are concentrated among the super-affluent, and where most tech workers are themselves foreign-born.  And,

Third, this economic shift will create the sort of long-term political realignments that occurred in the 1930s and the 1960s.

Economic confidence is up, but more voters, according to a Quinnipiac survey, still credit President Obama than President Trump.  However, while nearly 70% of Americans will remain non-college graduates who will want a well-paid job for which a high school diploma and perhaps a certificate in a specific skill will suffice, Trump can make the argument that he’s delivered economic hope to this long-ignored spectrum of the country’s population.  For most Americans, including the young and minorities, economic salvation lies in tactile professions like construction, manufacturing, warehousing, and energy, not with Google and Facebook. If the case is made that job opportunities in these fields would shrink under Democrat governance, electoral politics could get challenging for red-state Democrats, whose constituents work in these industries and live in communities dependent on them.  Historically “Democrat Party constituencies,” notably minorities and millennials, may have to choose between their disdain for “Trump the man” and “Trump’s economic policies,” which could demonstrably help them and, for the first time in a generation, offer them a glimmer of genuine hope.

References

1. com, 01/03/18. Peter Ferrara.  America’s Booming Economy Will Smash Democrats in 2018.

http://observer.com/2018/01/tax-reform-booming-economy-will-smash-democrats-in-2018-elections/

2. com, 1/12/18. Patti Domm. Economic growth under Trump has been strongest in 13 years.

https://www.msn.com/en-us/money/markets/economic-growth-under-trump-has-been-strongest-in-13-years/ar-AAuBVYc

3. com, December 5, 2017. Ray Dalio. Watch Out for the Effects of Tax Reform on Tax Migration, the Fiscal Conditions of Affected States and Cities, and Polarity in America.

https://www.linkedin.com/pulse/watch-out-effects-tax-reform-migration-fiscal-conditions-ray-dalio/

4. New York Times, SEPT. 1, 2017. KARL RUSSELL and NELSON D. SCHWARTZ.  What’s Driving Job Growth in Industrial America.

https://www.nytimes.com/interactive/2017/09/01/business/economy/manufacturing-trump-jobs.html?_r=1

5. Financial Post, January 12, 2018.  Claudia Cattaneo. Canada stuck on sidelines as U.S. oil boom creates jobs, curbs emissions.

http://business.financialpost.com/commodities/energy/u-s-oil-boom-creating-jobs-and-curbing-emissions-in-contrast-to-restrained-canadian-energy-policy

6. City Journal, January 17, 2018. Joel Kotkin. Can the Trump Economy Trump Trump.

https://www.city-journal.org/html/can-trump-economy-trump-trump-15679.html