Three Reasons to Be Optimistic About the U.S. Economy

Jordan Lawrence, Senior Economic and Investment Strategist, First Republic Investment Management

September 7, 2016

Where is the U.S. economy headed? The financial press faithfully chronicles each blip in the economic reports and interviews many pundits. We like to think about all the evidence, reach a conclusion and then factor that into our investment decisions.

Some economists hold a grim outlook for the economy’s future. They point to slowing labor productivity growth and a smaller working-age population. Plus, capital investment has fallen in spite of very low interest rates around the world. Collectively, these trends suggest economic growth will stay muted over the next decade.

On the horizon, however, we see trends that should have a positive impact on the U.S. economy and counterbalance the bleaker data points.

What to look for in the coming decade

If you’re one of those people who are inclined to look on the bright side of every situation, you’re in luck. Below are three trends that will have a favorable impact on the economy over the 10 years.

1. Millennials will hit their peak earning years

The oldest of the millennials — the massive generation born between about 1980 and 2000 — are now approaching their mid-30s. Data from the U.S. Bureau of Labor Statistics shows that Americans typically see their top earning years in their mid-30s through mid-50s and that those high-earning years also bring higher spending.1

Therefore, the U.S. economy should get a boost as millennials leverage their greater spending power. The million-dollar question: What will they spend it on? Many millennials delayed getting married, starting families and buying houses as they struggled through the Great Recession. They may now finally be able to do those things.

2. Housing price inflation will ease

Major cities like San Francisco, New York and Seattle — and even some smaller markets such as Portland — have seen skyrocketing housing prices. As a result, many first-time buyers have been priced out of these markets or seen their disposable incomes drop as they pay off gigantic mortgages.

We think new supply will eventually catch-up to today’s demand. The number of multifamily units currently under construction in the U.S. recently hit its highest level since October 1974. These units are typically apartment buildings, townhomes or duplexes. We are also seeing the proportion of multifamily units in the overall renter pool reach its highest peak since the mid-1980s.

The long-term effect of this multifamily construction boom will ultimately be competitive pressure to lower rents. This in turn should ease the high housing prices now seen in rapidly growing areas. Over time, a big increase in housing supply inevitably leads to home prices leveling off and falling more in line with income growth.

Another source for downward pressure on home prices is the reality that housing values typically depreciate over time (unless owners continually improve their properties). As a result, people will eventually be able to afford housing in hot markets such as San Francisco and New York through a more reasonable price-to-income ratio. This will provide them with greater spending power overall. 

3. Renewable energy will expand globally

Today, solar, wind and other renewable forms of energy only comprise about 10 percent of worldwide electricity generation.2 The expected trajectory of renewable energy in the economy is remarkable.

The costs of solar and wind energy production have fallen more than 80 percent over the past decade, thanks to innovation of solar photovoltaic (PV) and wind technologies coupled with increased demand. Developing countries such as China and India are already making huge solar investments as they try to reduce pollution from coal- and oil-fired power plants. Increasing use of solar and wind power will ultimately drive down the price of renewables even further. For example, the cost of onshore wind is expected to fall 41 percent between 2016 and 2040, while the cost of utility-scale solar should fall 60 percent over that same period, according to Bloomberg New Energy Finance.3

Thanks to large price declines and rising demand across the world, solar and wind energy will account for 30 percent of total worldwide power generation by 2040, Bloomberg forecasts. This large increase in renewable energy investments should fuel a nice growth period for the energy sector.

Putting it all together

The upcoming decade should bring several positive trends that will help the U.S. economy grow and buffer some of the darker growth predictions.                                                                                                       

1 – Bureau of Labor Statistics (, “Consumer expenditures vary by age,” December 2015

2 – Frankfurt School-UNEP Collaborating Centre for Climate & Sustainable Energy Finance and Bloomberg New Energy Finance, Global Trends in Renewable Energy Investment 2016

3 – Bloomberg New Energy Finance, New Energy Outlook 2016

The information in this article is presented as is.

©First Republic Investment Management 2016