By David Sterman
The Great Depression is an era few of us would choose to revisit.
Though the economy isn't especially perky these days, key measures of joblessness, poverty and hunger are nowhere near the levels seen back in the 1930s.
But by one key measure, the economy is actually in worse shape. From 1930 until 1933, the U.S. economy grew less than 3% each year. That was the longest such streak of the 20th century -- and we've already broken it in the 21st century.
We're on pace for a sixth straight year of sub-3% GDP growth, and signs are pointing continued anemic growth in the years ahead (which I'll expand upon in a moment).
Frankly, anything near 3% GDP growth would be welcome. We appear to have approached that level in the third quarter, hitting 2.8%. But almost a full percentage point of that was due to a buildup in inventories, and such gains tend to reverse in the following quarter. Translation: Get ready for 2% GDP growth -- at best -- in the fourth quarter. The recent government shutdown means we may end up closer to 1.5%.
Of course the stock market seems to be simply ignoring the economic travails. As I noted in a recent column
, the Wilshire 5000 has risen 68% since the end of 2009 -- yet the economy has grown just 17%.
If you don't want to believe that the Federal Reserve's liquidity-inducing quantitative easing (QE) programs haven't been the main catalyst behind this impressive multi-year stock market rally, then you must believe that today's share prices reflect better economic days ahead. To be sure, if the economy began to grow at a 3% pace for several years, all of the market's recent gains would be justified, and stocks would likely rise much more from here.
So it's a huge question, especially in light of the fact that the Fed's QE programs are reaching the late innings.
How to get to 3%
There are a few simple markers to assess an economy's growth potential. The first is population growth.
All other things being equal, population growth boosts the economy by a commensurate amount. A combination of immigration and childbirths are adding roughly 1% to our economy annually (which is far better than our peers in Europe, Russia and Japan).
The next factor is productivity enhancements, which were a primary driver of solid economic growth in the 1990s. Back then, the Internet, email and fast telecom networks all contributed to substantial gains in employee effectiveness and efficiency. Investments in automation on the factory floor also played a role in rising productivity.
Productivity may be the truest measure of an economy's health relative to other economies. Germany's ability to grow in recent years while neighboring economies stumbled was largely due to high and rising productivity figures.
Here in the U.S., you can actually spot a phase of decelerating productivity growth in 2005 onward. Productivity gains picked up in 2009 and 2010 as companies maintained output with fewer workers. Productivity growth remains below 2.0%
Source: Bureau of Labor Statistics
There are two factors working against rising productivity gains in the years ahead.
First, companies are already operating in an extremely lean fashion, so they can't cut headcount any further. Second, wages have been depressed for quite some time, and calls are growing for an increase in salaries in general by the squeezed middle class, and the minimum wage in particular
for low-income workers. Another source of economic growth is consumer spending, which accounts for two-thirds of the U.S. economy. In recent months, consumers' moods have darkened: The Conference Board's Consumer Confidence Index
, fell sharply in October to 71.2 (compared with a baseline of 100 in 1985).
The ongoing budget squabbles in Washington are likely to keep confidence levels depressed until a permanent fix to the budget crisis is in hand. And that sour mood is having a clear impact on consumer spending. Retail spending grew at a 1.5% annual pace in the third quarter, down from a 1.8% rate in the second quarter.
Besides consumers, corporations also play a major role in economic trends through their decision to make capital investments. Recently, companies have not felt inspired to spend, as Goldman Sachs economist Jan Hatzius notes: "Business investment has been weak so far this year and grew a disappointing 1.6% in (the third quarter). But it is not surprising that businesses have been hesitant about investing in a year that included a $200 billion tax hike hitting consumers and a large drop in government spending."
The year ahead -- and beyond
With these factors in mind, what can we expect from 2014? Well, we know that population growth is likely to again be below 1%, and productivity gains may also remain weak as the factors cited above remain in place.
But what about the other two factors, consumer and corporate spending? Well, getting a read on consumers' long-term plans is tricky. We know that household balance sheets are now in very strong shape after credit card balances have been reduced and mortgages are getting paid down. (According to the New York Fed, total household indebtedness has fallen to $11 trillion, more than 10% below the peak of $12.7 trillion in the third quarter of 2008.)
With that backdrop, a firming U.S. economy could inspire consumers to break out the checkbooks and boost their spending in 2014 and beyond.
But keep your expectations in check. Auto sales, for example, have been fairly robust in the past few years, and many people are no longer tooling around in rusting jalopies. Rising interest rates could blunt the momentum for auto sales and other big ticket items.
On the corporate front, a stronger case for optimism can be made. Goldman Sachs' Hatzius, taking note of the subpar levels of capital spending, sees better days ahead: The "fundamental drivers of business investment growth remain strongly supportive. Profit rates are high, lending standards continue to ease, and the starting level of investment remains low. We expect capital spending to strengthen next year, with an added boost if consumption recovers in line with our forecast. This reinforces our view that private sector spending should accelerate in 2014, pushing GDP growth into the 3-3.5% range."
There's that 3% GDP figure I mentioned at the beginning of this article. Trouble is, back in 2011 and 2012, economists year-end predictions for the year ahead called for the U.S. economy to finally start expanding at a 3% pace. But as each year has progressed, the refrain "wait until next year" starts to be heard, as we end up falling far short of the 3% goal line.
Risks to consider: As an upside risk, consumers and corporations mays tart to conclude that the mess in Washington is no longer worth bothering about, and long-stalled spending plans may finally kick in.
Action to take: As the Fed starts to approach the end of QE, it's crucial that the U.S. economy starts to stand on its own legs and build a head of steam. A decision back in September to keep QE in place for a while longer was based on the Fed's concerns that the economy simply isn't poised for growth in the quarters ahead. If the malaise persists in coming months, look for bullish economists such as Goldman's Hatzius to dampen their views about 3% GDP growth in 2014.
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