The Plow Horse is Dead

Brian Wesbury, Chief Economist at First Trust Advisors L.P., shares his economic perspective and stock market outlook.

Summary

• "the plow horse is dead"
• the economy is about to accelerate, and with it the stock market as well.
• remember how we got the plow horse
• we have unbelievable technologies in America today - fracking, the human genome, the cloud, smartphones, tablets, 3D printing.
• all of these technologies, would be called thoroughbreds - they’re raising productivity, their raising efficiency, and yet the economy has only grown 2.1% in real GDP over the past 7 1/2 years.
• Why? I believe the jockey that rides that thoroughbred has gotten too big. The jockey is the government.
• Remember, every dime the government spends, comes from the private sector.
• It is either borrowed or taxed.
• Either way, it crowds out private investment and the reinvestment of capital, it makes it harder to raise living standards, to create jobs, and its held our real growth down.
• The jockey is about to shrink
• In 2000, government spending in the U.S. was 17.6% of GDP - last year in 2016 it was 21.1% of GDP - that means that 3.5% of the economy, a huge amount, was taken away from the private sector, and transferred to the government.
• my research shows that every percentage point that the government grows, subtracts 2 or 3 tenths of a percent from real GDP growth - so that’s about one percent of growth, one percent of growth that we could have grown by.
• I believe that's how we got from the 3 percents of economic growth to the 2 percents of economic growth.
• The miracle of the American economy is that in spite of tax hikes, in spite of regulatory hikes, in spite of that increase in government spending, we were still able to grow at 2.1%
• That’s a miracle - we did create jobs, we did boost economic activity, corporate profits in the stock market, but we could have done so much better.
• I don’t want to act as though Donald Trump is the answer to every prayer that every American has, however, if we do reduce tax rates, we do cut regulation, and we have already heard that we are going to reduce spending - in fact the President has already signed an executive order freezing federal hiring, anything outside of defense and national security - don’t forget, somewhere between 1/4 and 1/3 of all government employees are baby boomers getting ready to retire, and we can replace a lot of those jobs with the technology that we’ve invented over the past 8 years.
• What a better time to try and shrink the size of government, and when we do shrink the size of that jockey, our thoroughbred can run faster.
• I expect growth to move towards 3%, and eventually toward 4% in the years ahead and as long as these policies are put into place - to cut spending, cut regulation, and cut tax rates.
• As a result, I believe the economy and the stock market are going to do very well.
• One last quick point: right now the S&P consensus of analysts, of the analysts who analyze the earnings of all the companies in the S&P expect earnings for the S&P for 2017 to be $130/share of the S&P - that’s about a 20% increase from 2016 to 2017.
• That means that current P/E ratios are around 17.5.
• They can go much higher with a better set of policies.
• Get ready. This plow horse is going to start to run - a boom is on its way

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