The Emerging Shift in Economic Growth Drivers

As we head into this week's Fourth of July celebrations, it's worth highlighting the domestic journey the U.S. is currently embarking on. The attempted supply-side rejuvenation of the U.S. economy via an industrial growth policy further supports the already unfolding capex boom. In this week's Economics Weekly, William Blair Macro Analyst Richard de Chazal reexamines America's trajectory and what this could mean for the structure of growth dynamics going forward.

The Return of Supply-Side Economics

Under Presidents Biden and Trump, the U.S. has decisively moved away from the neoliberal laissez-faire growth models strongly personified by the Clinton, Bush Jr., and Obama terms in office and returned to promoting a supply-side agenda, as pursued by President Reagan.

The neoliberal model was built on the view that with U.S. hegemony inalienable, open free trade with emerging nations, such as China-hyper-globalization-would result in a win-win situation for both parties, even if one party was (for a time) not on a level playing field. Aggregate trade increased substantially even amid aggressively protectionist measures, including a deeply undervalued exchange rate, heavily depressed wages, closed capital markets to foreign ownership, and the forced transfer of technology and IP. All these actions were tolerated with the view that, eventually, they would result in the emergence of a new mammoth global consumer that would hoover up American exports.

That hasn't happened yet. China continues to run a heavily imbalanced economy that is biased toward investment spending over consumer spending. In the meantime, many U.S. industries and towns were hollowed out, and IP was lost. Most companies are now much less inclined to discuss China's total addressable market (TAM) opportunities. In recent years, many have made it a point to tell investors just how limited their exposure to that country is.

Meanwhile, a new industrial growth strategy has emerged under President Trump and now under President Biden.

President Trump preferred to engage this strategy via lower corporate taxes and increased tariffs on foreign goods, which he says will be pursued with much more vigor if he's reelected, along with a forced devaluation of the dollar, where winning was defined as shrinking the trade deficit. President Biden preferred a strategy of subsidies and incentives to strategic industries. Through the Inflation Reduction Act, the Infrastructure Investment and Jobs Act, and the CHIPS and Science Act, Biden is attempting to relevel the playing field.

As expensive as these acts seem, they're still less than four times smaller than the subsidies being issued by China to its industries. The report by the Kiel Institute notes that 99% of listed firms in China received direct government subsidies in 2022.

The goals of the Biden administration's policies include increasing supply chain independence, tightening national security, harnessing new technology to limit the impact of climate change, and providing for a cleaner energy future. They also endeavor to rejuvenate the country's industrial manufacturing base and the national psyche in the process. Measuring success should include several factors, such as: rising productivity, stable inflation, a better mix between corporate profits and employees' wages, lower carbon emissions and increased use of greener energy deficit, and greater business investment and industrial growth.

The industries that are most directly impacted include semiconductors, defense, renewable energy, materials (steel, aluminum, copper, raw critical materials, and chemicals), and technology. Achieving results will take time, and there are few signs of improvement just yet.

Shifting Growth Share

If successful, this industrial growth shift should also likely result in a slightly smaller personal consumption share of gross domestic product (GDP) unless accounted for by a reduced share from government investment or trade, given that GDP = C + I + (X-M) + G.

The period from the late 1960s to the global financial crisis (GFC) was very much the age of the U.S. consumer. Over this period, total personal consumption expenditure (PCE) as a share of the economy increased from 59% to 69%-nominal CDP increased by a 6.9% CAGR and nominal PCE by a faster 7.3% CAGR. The question at the time was, how much share of GDP can the consumer continue to take before it squeezes the other components (government, business investment, and net exports)?

As it turned out, the answer was not too much more. Since the GFC, the PCE share of GDP has been relatively flat, slipping to 68% (with nominal GDP of 4.7% and PCE of 4.6% % over this more recent period).

That PCE growth for 1967-2009 was driven by a combination of factors, including the post-war baby boom, greater female and racial integration, more rapid immigration, advances in healthcare, education, geopolitical power, and just as importantly, the "democratization" of consumer credit from the 1980s up to the GFC. These factors are either in reverse or no longer having as positive a contribution these days. Conversely, the other GDP components were under more pressure at the time, particularly business fixed investment and net exports on the back of globalization.

As a result, one measure of success here should be a rising investment share of GDO being offset by a moderating PCE share of growth, all things being equal.

Even as China seemingly refuses to shift its strategy away from investment- and export-led growth toward a rising consumer share of GDP, the U.S. is attempting to turn a corner on its growth drivers. It, too, is now aiming for higher investment- and export-led growth.

This growth shift could come at the expense of the consumer's share of aggregate GDP. This means consumer spending could shift to be more in line and slightly lower than the trend of GDP growth in the coming years.

Both Presidents Biden and Trump are pursuing this supply-side growth strategy. There is considerable overlap around policies involving tariffs and types of targeted industries, as well as targeted countries. Still, more consensus is needed between the two around subsidies and tax rates. This shift in strategy is in stark contrast to the neoliberal laissez-faire policies through the 1990s and early 2000s. The strategic success should be measured through increases in productivity growth, stable inflation, and faster growth in those targeted industries. Still, success may also be reflected in the relative decline in consumers' share of aggregate growth.

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