In a recession, you must be able to call into question everything you’ve done before — Francios-Henri Pinault
Over the past few years, U.S. quarterly economic growth has followed a familiar pattern.
First quarter results have generally been weak, with weather and seasonal factors partially to blame. Second quarter numbers have been much stronger, with a leveling off over the remainder of the year.
Each year, after the disappointing first-quarter, pundits start questioning whether or not the pace of economic recovery — modest by historical standards — is beginning to lose steam. Lost in the discussion is the fact that the recovery is now in its 75th month, making it the fifth-longest period of expansion since the 1850s.
And yet, annual growth rate during the current recovery has been underwhelming. Worse still, the long-term trend has been in decline since the 1970s, vexing Republican and Democratic administrations alike.
What’s going on? The following three charts illustrate the headwinds facing the economy.
The Pace of Productivity Has Fallen
Investopedia defines productivity as follows:
An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in revenues and other GDP components such as business inventories. Productivity measures may be examined collectively (across the whole economy) or viewed industry by industry to examine trends in labor growth, wage levels and technological improvement.
Despite gains due to the Internet age, the pace of labor productivity has been sliding since the mid-1970s.
As shown in the chart, annual productivity increases in the non-farm business sector averaged 2.8% from 1947 through 1973. Since then, productivity has trended downward, averaging annual increases of just 1.8%. Decreasing gains in labor productivity equate to slower overall growth in the economy.
Income Inequality Is on a Negative Trend
The top 10% of income-earners in the U.S. don’t spend more on pillow cases, groceries, lawn mowers or toothpaste than the rest of the population. Instead, they invest the majority of their excess income. Investment returns widen the income inequality gap, which is now at levels not seen since the 1920s.
With investments by the top income earners replacing spending as wealth redistributes upward, the net result is drag against GDP growth.
Aggressive Monetary Policy
Decades ago, the business cycle was much shorter than it is today. The gray areas in the chart at the top represent recessions, and between 1950 and 1982 there were a total of seven — one every 4.5 years.
By contrast, the U.S. has experienced just three recessions since 1982.
Over the past 30+ years, the Federal Reserve has fought economic slowdowns by flooding the economy with dollars.
The upside is the relative rarity in which recessions now strike.
The downside is an endless cycle of low interest rates, trillions of excess dollars in circulation, and a national debt of nearly $18.5 trillion.Aggressive monetary policy increases short-term demand during recessionary periods, but the resulting low interest rates have fueled speculation at the expense of consumption.
Furthermore, interest on the national debt is choking off discretionary government spending, including projects that create jobs and contribute to infrastructure.
Lastly, the political battles over how to solve the problem have netted one government shutdown, threatened numerous others, and shaken the public’s confidence in the stability of the economy.
The last point is emphasized by the Consumer Confidence Index, which stands at 103.0 as of September, 2015. Although now at a nine-year high, it’s been on a general downward trend since the late 1990s.
U.S. Economy: Reversing the Trends
The adverse trends facing the U.S. economy cannot continue forever. Declining gains in productivity, increasing income inequality and aggressive monetary policy will eventually need to be reversed if the economy is to see growth rates approaching post-war historical averages.
As always, the politicians are too busy kicking the can down the road to solve the economy’s long-term structural problems. As John Naisbitt once wrote, “Trends, like horses, are easier to ride in the direction they are going.”