The Four Numbers That Tell Our Economic Future

2.7%, 3.9%, 3%, and 4.7%.

Know what those numbers mean, and you can be your own economic forecaster.

2.7%% is the rate at which the International Monetary Fund is expecting the U.S. economy to grow this year. That is up from the 2.3% forecast the IMF came up with only a few months ago, a revision due in good part to the increased investment by American corporations resulting from “the recently approved U.S. tax policy changes.”

That will help boost the world growth rate to 3.9% “Growth this broad and strong has not been seen since the world’s initial sharp 2010 bounce back from the financial crisis of 2008-09,” according to the IMF.

But don’t uncork the champagne just yet. That forecast, and others pointing in the same direction, contained the seeds of their own disproof. Investors read into these numbers a sign that accelerating growth would produce accelerating inflation. Not without reason. Global commodity prices are up enough to “bear watching [and] . . . put modest upward pressure on the inflation rate,” according to the Lindsey Group.

And our economy is starting to run into constraints on growth that should see all sorts of prices bid up.

Companies can’t find skilled drivers to move goods from warehouses to consumers;
Oil and gas producers in the Permian Basin are facing shortages of pipeline capacity;
The backlog of orders for manufactured goods is at its highest level in 14 years.
Meanwhile, delivery times in Europe are stretched to almost their longest in 20 years and firms there are complaining about labor and equipment shortages creating cost pressures on global supply chains. If all of these bottlenecks set companies bidding for scarce materials and workers, the Federal Reserve Board’s monetary policy committee just might decide that the two additional rate increases scheduled to follow March’s rise might not be enough to control inflationary forces, and ink in a fourth rise. A month ago traders were assigning a 33% probability to such a move; last week that jumped to almost 50%.

Add to all of that the possibility that talks being held in Beijing between Chinese officials and a Trump-appointed negotiating team that includes Peter Navarro (the tariff-lover) and Larry Kudlow (the tariff-hater) might collapse. That would mean the imposition of very high tariffs on a host of Chinese and American imports, driving up prices in both of the world’s two largest economies.

Surveying that global economic scene, investors here decided to demand a bit more protection against inflation, and bid up the interest rate (lowered the price they would pay) on 10-year Treasury bonds to above the 3% level that has a semi-mystical significance-a sort of accepted benchmark-for reasons that are not well understood. In a way, that’s good news, because it means investors now believe that growth will not peter out as has happened in the recent past. But it is also bad news for businesses that borrow to invest, for our government that will see interest payments on our national debt rise, and for consumers who borrow to finance cars, trucks and house purchases.

Which brings us to 4.7%, the fourth of our key numbers. That’s the current interest rate on a typical 30-year mortgage in the United States. It has risen a full percentage point since last September and is now at a 4-year high. It is the highest many of today’s potential home-buyers have ever confronted, and requires higher monthly payments of about $200, $2,400 annually. No surprise that mortgage applications have dropped, as have the share prices of many home builders.

In the longer term, the downside risks increase. Most economies have rather high levels of national debt, and are vulnerable to rising interest rates. In the United States the recent tax cuts have driven up deficits. Estimates vary, but the best guess is that the revenue loss of about $1.5 trillion over ten years will be offset by a $500 billion increase in the taxes flowing to the Treasury from accelerated growth. Throw in added costs due to higher interest payments on the added debt, and the total amount of new red ink comes to about $1.3 trillion.

Unless interest rates rise. Which they surely will. In which case the deficit will be considerably higher. Or growth hits the 4% annual rate the Trump team foresees, more or less alone among practitioners of the forecasting art. In which case the deficits virtually disappear. In short, we are setting sail on a sea of doubt when it comes to estimating future deficits.

In such a case, prudence demands that policymakers plan for the worst and hope for the best. The worst would be a debt load so high that interest payments claim such a large part of total tax revenues that there is little cash left to meet promises made to an aging population with a large appetite for new medical treatments; or to face military threats from the Middle East to the South China Sea to the Korean peninsula. So high that interest rates soar to growth-stifling levels as lenders demand ever-higher interest rates from a debtor that is increasingly likely to pay its debts with a debased currency.

The losers will be those who can least afford to end up with dollars that buy less. The already well-off have houses and shares likely to rise in value to keep pace with inflation. The less well-off do not. So let’s hope that the cooling effect of 3% and 4.7% leaves growth closer to 2.7% in America, rather than the below-2% rate of recent years. And that the higher rate would contribute to maintaining global growth at 3.9%.

Just jot down the four numbers and reach your own conclusions.