The title of today’s commentary isn’t meant to describe our forecasting style, though Debbie and I try to be as steady as possible. Rather, we’re thinking about the remarkable stability of the growth in real GDP in the US. That may seem odd given the erratic growth rates of real GDP on a quarter-over-quarter, seasonally adjusted annual rate basis over the past five quarters from Q1-2016 through Q1-2017: 0.8%, 1.4%, 3.5%, 2.1%, and 1.2% (Fig. 1). However, the underlying growth rate measured on a year-over-year basis has been remarkably stable around 2.0% since Q1-2010, within a range of 1.0% and 3.3% (Fig. 2). It was exactly 2.0% during the first quarter.
We recall that starting in 2010, perma-bears warned that 2.0% was the economy’s “stall speed.” They were right about the past: During previous economic expansions, whenever real GDP growth slowed to 2.0% on a y/y basis, the economy subsequently fell into a recession (Fig. 3). So far, they’ve been wrong about the current expansion. It continues apace, growing around 2.0% without stalling. Perhaps that’s because real GDP excluding government spending has been growing around 3.0% since 2010 (Fig. 4). It was 2.6% during the first quarter. The growth rate of government spending in real GDP (which does not include spending on income redistribution programs) has been mostly negative since the start of the current expansion (Fig. 5). That’s unusually weak and may reflect the fact that spending on entitlements is so huge now that it is crowding out government spending on goods and services.
Nevertheless, this proves that the economy can grow just fine without the help of government spending. While we are digressing: Eddie Clarence Murray was a former Major League Baseball player, who was known as one of the most reliable hitters of his time and hence was nicknamed “Steady Eddie.” He was elected to the Baseball Hall of Fame in 2003. “Fast Eddie” was the nickname of Eddie Parker, the accomplished pocket billiards player memorialized in the movie “The Hustler.” Eddie Antar owned Crazy Eddie, a chain of electronics stores in the Northeast, until he was charged with fraud and spent eight years in prison.
Steady Eddie was clearly the most respectable and predictable of the three Eddies. The economy’s Steady Eddie performance is gaining more respect. No one is warning about stall speed. Fewer economists are calling it the “New Normal,” since it isn’t so new anymore. Few are calling it “secular stagnation,” with the exception of Larry Summers, who revived this post-WWII scenario in a 11/25/13 speech at the IMF. He did it again in an interview with David Wessel that was summarized in a 5/25 WSJ article titled “‘Secular Stagnation’ Even Truer Today, Larry Summers Says.” Here are a few key points:
(1) Victory lap. Summers took a victory lap, claiming, according to Wessel, “that he has been vindicated by slow economic growth, low inflation and low interest rates, which many forecasters now expect to persist. Today, he is more convinced than ever that secular stagnation is the defining economic problem of our time—one that won’t be easily defeated as long as fiscal authorities are overly preoccupied with debt and central bankers are overly focused on keeping inflation at low levels.”
(2) Explaining stagnation. Summers rattles off lots of reasons for the slowdown in economic growth and for historically low nominal and real interest rates. Demography is important. So are increased risk aversion and a shortage of safe assets. Income inequality and a higher propensity to save are also on his list. Lenders are less willing and/or less able to lend. Corporations aren’t spending enough.
(3) Demand vs. supply. Summers acknowledges that secular stagnation might not be all about insufficient demand. Nevertheless, he concludes, “So, first, more public investment I think is a good thing.” Spoken like a true Keynesian fiscal stimulator.
US Economy II: Demography Is Destiny. There may be lots of reasonable explanations for the slowdown in economic growth. They may all be valid. However, we think that demographic trends account for most of the slowdown. Nevertheless, as noted above, the private sector has been growing at a respectable rate notwithstanding all the angst about secular stagnation. The record high in stock prices certainly shows that investors aren’t particularly concerned about chronically weak growth.
Still, there is no getting around the demographic facts. Consider the following:
(1) Population. The 10-year growth at an annual rate of the working-age population fell to 1.0% in April, the lowest since the start of the series in the late 1950s (Fig. 6). More significant is that the working-age population 16-64 years old grew just 0.5% per year on average over the past 10 years, through April. That’s the lowest on record!
(2) Labor force. The civilian labor force that is 16-64 years old rose just 0.3% at an annual rate over the past 10 years (Fig. 7). That’s the lowest on record, which starts in 1958.
(3) Age waves. The demographic trends shown by the population and labor force data have been very much impacted by the Baby Boom. In addition, fertility rates have declined, while people are living longer. The growth rates of the labor force by age cohorts looks like a wave pattern on an old-fashioned oscilloscope (Fig. 8).
The important observation is that the 25- to 34-year-old segment of the labor force is growing, while the 35-44 and 45-54 groups are declining. They are declining partly because there may be more dropouts than in the past. However, the main reason for their declines is that the Baby Boomers are aging into the 55-64 and 65+ cohorts.
The rising growth rate of younger workers and the declining growth rates of older workers can easily explain why productivity growth is weak and why wage inflation remains subdued despite a tight labor market. They can also explain why demand growth might remain lower than in the past.
Japan: Death Cross. In many ways, Japan is the poster child of a modern industrial economy that is struggling with secular stagnation. The Japanese government has tried numerous rounds of fiscal and monetary stimulus without much success. The problem is a rapidly aging population that is also shrinking. Japan “is currently the oldest nation in the world and is projected to retain this position through at least 2050,” notes the Census Bureau’s March 2016 report An Aging World: 2015. Japan’s elderly population percentage increased from 12% in 1990 to 25% in 2014. The working-age population percentage fell from 69% to 62% over this same period. Since July 2007—when the number of deaths exceeded the number of births for the first time, with the gap between the two continuing to widen—Japan’s population declined by 1.0 million through May 2017 (Fig. 9).
Global Economy: Less Stagnation! Now the good news: It’s a big world out there, with lots of aspirational workers and materialistic consumers. Demographic forces will continue to weigh on economic growth worldwide, because fertility rates are down while longevity is up almost everywhere. However, around the world, particularly in emerging market economies, there are still plenty of people who want a better standard of living.
We have found that one of the best ways to track global economic activity is with the yearly percent change in the sum of US exports and imports, both adjusted for inflation (Fig. 10). It is highly correlated with the yearly percent change in the volume of world exports. The former was up 5.0% through March, holding near its best growth rate since December 2014, while the latter was up 6.1% over the same period, its best rate since April 2011. Global economic activity is clearly improving.
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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