President Donald Trump and his supporters have been quick to assert that his aggressively pro-business outlook and agenda have stirred up positive "animal spirits" in the U.S. economy, a phrase coined by British economist John Maynard Keynes in 1930s.
No doubt, many measures of optimism and confidence among consumers, small business owners, corporate CEOs and CFOs have soared since the election, some of them to longtime or all-time highs, the Wall Street Journal reports. Such confidence and optimism, in turn, has been a factor fueling stock prices, as bullish investors see a virtuous cycle building in which confident consumers buy, confident business owners hire, and confident CEOs invest, the Journal says.
But the positive sentiments fired up by these animal spirits may not translate into strong economic growth. The consensus among economists is that annual U.S. GDP growth will be modest: 2.4% in 2017, 2.5% in 2018, and then slow sharply to 2.1% in 2019 and thereafter, according to a survey by the Journal. While the 2017 and 2018 projections are up from the respective consensus estimates of 2.2% and 2.0% from before the election, these figures are still far short of Trump's official promise during his campaign and as President to deliver 4% growth.
Defining 'Animal Spirits'
In his General Theory, Keynes defined "animal spirits" as "a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities." In order words, "animal spirits" are the instincts or "gut feel" that a business person or investor brings to decision making under uncertainty, presumably based on experience. Indeed, even the most rigorous quantitative analysis itself typically rests upon numerous assumptions that can be challenged, and often does not yield unambiguous signals about the proper course of action going forward. Meanwhile, in a marked departure from Keynes' original meaning, today some behavioral economists use "animal spirits" as synonymous with irrational decision-making, according to professors Alexander Dow and Sheila C. Dow.
While the economists surveyed by the Journal expect on, average, 2.4% U.S. GDP growth in 2017, a survey conducted by Consensus Economics showed the average forecast of economists was for a smaller GDP increase this year, only 2.2%, which is barely above what economists forecast at this time a year ago and less than forecasts in March of 2014 and 2015, according to the Journal. The pessimists currently see bearish indicators such as commercial and industrial lending that has declined for four straight months for the first time in six years. Meanwhile, much of the upsurge in confidence is based on expectations that Trump will deliver on his promises of tax cuts, infrastructure spending and deregulation. The danger is that failure to deliver would shatter that confidence.
Long Term Outlook
In the short term, infrastructure spending and other forms of fiscal stimulus can push U.S. GDP growth temporarily above its long-term path, the Journal notes. In the long term, however, most economists agree that GDP growth is a function of workforce and productivity growth. Trump's restrictive stance on immigration would impede workforce growth, and turning around the problem of weak productivity improvement is not amenable to a quick fix. So whether the power of animal spirits is real, or at least whether they can exert a tangible impact, may be determined by whether Trump can dramatically expand what now is a slow-growth economy. (For more, see also: Depression-Era Headwinds Restrain the Economy.)