Neuberger Berman considers what is ahead for US growth
Despite ongoing pessimism regarding developments in the US, Neuberger Berman’s Investment Strategy Group says that there are reasons not to be so fearful of growth rates over the coming decade.
For much of the past century, the United States has been a dominant force in the world economy. US GDP has consistently accounted for over 20% of global GDP, despite representing only a fraction of the world’s population. Growth was strong, particularly after the World War II era, as the private sector and the middle class flourished. US economic vitality has been showcased by its robust stock market, which still accounts for well over 40% of the world’s market capitalization, having peaked at 55% in 2003.
This era of prosperity has been supported by (often) smart policy choices and favorable circumstances, such as high levels of migration, that provided a stable and growing source of labor; technological innovations that increased productivity; and strong governance through a combination of effective legislation and public works (e.g., the interstate highway system)-all of which spurred economic growth.
In recent years, however, growth has decelerated as the financial crisis of 2008 inflicted a lengthier period of economic stagnation than previous recessions, with recovery efforts being hampered by a weakened real estate sector and structural changes to the employment market. Looking ahead, investors are now confronted with this question: Can the US economy recover its past glory or will the future resemble Japan’s “lost decade”?
Financial recessions and lessons from Japan
The US economy’s anemic recovery and persistently high unemployment rate seem to foreshadow a dour future. However, there are reasons to debunk such a depressed outlook. First of all, one must to take into account the US’s recent recovery from a global financial crisis. Academic literature on the impact of financial-related recessions suggests that global crises do not result in “run-of-the-mill” recessions. Instead,recovery usually takes longer because a process of deleveraging, i.e., debt reduction, would have to occur before growth could resume to trend levels. During this period, credit creation would typically remain lackluster while banks cleared their balance sheets of bad debts. At the same time, the afflicted country would often be ensnared in the “paradox of thrift,” whereby simultaneous increases in savings across all sectors would cause aggregate demand to collapse.
Fortunately for the US economy, it appears that the private sector is currently in the final stages of deleveraging. Thus, the debate on austerity has migrated to the public sector, which generally tolerates large deficits due to the effects of automatic stabilizers and fiscal stimulus. Although deleveraging in the public sector can span longer time periods, GDP growth typically reaccelerates at this point and comes closer to trend growth-as evidenced by countries in the Nordic region during their last major banking crisis.
As for the oft-cited crisis that hit Japan at the start of the 1990s, leading to more than a decade of weak growth and deflation, there is evidence to suggest that the US may not suffer a comparable fate. For instance, it took Japan a long time to acknowledge its deflationary environment, and the Japanese government’s initially tepid policy response caused widespread loss of confidence, which contributed to a protracted recession.
The US government, on the other hand, learned from the Japanese experience and introduced immediate and forceful actions to prevent deflation. In fact, the Fed’s use of unconventional bond buying measures during the US crisis represents a more powerful version of a similar program that was launched by the Bank of Japan in the early 2000s.