SUMMARY
- The expectations of US GDP growth have slowed to 1.7-2.0% for the next 5 to 10 years.
- High market valuations and slow growth are toxic in the medium term.
- Demographics and high debt levels are likely to slow growth over the next decade or two.
- 2017 tax, trade, and regulation reforms are likely to improve growth but effects won’t be felt immediately.
INTRODUCTION
I read “The Age of Stagnation: Why Perpetual Growth is Unattainable and the Global Economy is in Peril” by Satyajit Das (2016) following “Balance Sheet Recessions and the QE Trap” by Richard Koo trying to understand why growth in the economy has been slow for so long and if we are going to follow in Japan’s footsteps of frequent recessions and deflation. I believe that we are in a “supercycle” of stagnant growth, but there are two camps with different views on the causes of secular stagnation. The first camp is exemplified economists like Larry Summers who believe that we are in an age of secular stagnation due to demographics and high debt among other reasons. The second camp is more the exemplified by Peter Navarro who attributes the causes to be self-inflicted via high taxes, stifling regulations, and poorly managed trade deals. This article scratches the surface of these causes of stagnation and the current business cycle.
Current trends in the Leading Indicator, Coincident Indicator, Real Personal Consumption Expenditures, Real Personal Income and Real GDP growth are unfavorable entering 2017 as shown below. On the last trading day of 2014, the S&P 500 stood at 2059, which is an average annual return of about 5.0% including dividends for the two years. During that two year period, real GDP grew at an annual rate of about 1.9%, companies repurchased about a trillion dollars of stock (Factset) which is about 4% of market capitalization (FRED) or 5% of GDP, and corporate profits before tax with inventory valuation adjustments and capital consumption adjustment declined about 3%. The S&P 500 price to earnings ratio increased 29% from 19.5 to 25.2.
The NYFRB estimates that Q4 GDP growth will be 2.4%. The IMF World Economic Outlook estimates that Real GDP growth will be 1.6% in 2016 for the US with only a modest pickup in 2017 and no improvement in 2018 (See Jeffrey Snider, “IMF Finally Kills The Recovery”). The average probability of a recession in the next 12 months by Economic Forecasting Survey of economists is 19%, however about 17% of those surveyed place the probability higher than 30%. My recession indicator has declined from 40 to 33 percent as shown below. These are the current cyclical trends.
The secular trends highlight the continuation of a “supercycle” from the past two decades into the next decade. A more optimistic view with valid arguments from Morgan Stanley is included and followed up with a section about what President-elect Trump faces and his platform. Scott Sumner in “Canada Is Also Stagnating” described that Real GDP per Capita (blue line) in the US has only grown about 4% over the past 10 years. The year over year change (red line) has been declining since the beginning of 2015. This is part of the historical secular trend.
According to The Telegraph, Stanley Fischer, the Fed's Vice-Chairman, said the Fed has run out of ammunition and that this could lead to "longer and deeper recessions when the economy is hit by negative shocks" (see Fed risks repeating Lehman blunder as US recession storm gathers). These are some of the future secular trends.
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