Most analysts and economists agree that the global financial crisis, in tandem with mounting demographic downdrafts, has reduced the trend level of US growth. The workout from excessive leverage, the overhang of excess capacity, and the structural drag of an aging population all contribute to a decline in trend growth.
More elaborate analysis, considering the sub-optimal capital allocation that accompanied quantitative easing, and the “pulling forward” of future demand, draw similar conclusions—growth simply ain’t what it used to be. US real GDP growth since the third quarter of 2009 (the first quarter of positive growth after the financial crisis) has averaged 2.2%; by contrast, growth from the third quarter of 1985 to the end of 2007 averaged 3.1%. If we look in nominal terms—the type of growth consumers feel, rather than the type economists obsesses about—the differential is starker still: 3.8% post-crisis, vs. 5.7% pre-crisis.
Well, here it is folks, the “new normal”. Not much fun, is it? However, to be clear, the U.S. isn’t in recession. Indeed, few if any of the usual recession indicators are anywhere near stressed levels. Delinquency levels, debt-to-income, capex-to-sales and jobless claims, to name but a few, are at comfortable levels. But it is equally true that the dynamism of an economy that is in mid-cycle on most metrics just isn’t there.
Perhaps this is not surprising. For instance, if we assume wages keep pace with nominal GDP over the long run, then the 2% difference in growth rates pre-and post- crisis compounds to a 12% undershoot from 2009 to today. That’s around $5,600 a year by now for a US worker on average annual earnings.
Low energy prices, low mortgage costs and persistently low inflation are all helping to support personal consumption, which came in over 3% in each of the last two quarters. But with inventories detracting 1.4% and net trade flat in the third quarter, the overall picture on US growth is lacklustre.
Against this backdrop, earnings growth is likely to be positive—if unexciting—in 2016 which should see stocks, on aggregate, drift higher. But woe betide those firms who miss – especially in fully valued consumer sectors. The upside risk to bond yields is probably limited, even if the Fed does raise rates in December—for bond yields, like equities, a grind upwards looks more likely than a sharp jump.
But for multi-asset investors there’s always a bull market somewhere; indeed, the combination of unexciting growth, low risk of US recession, and a dovish trajectory for interest rates is supportive for credit. We acknowledge the liquidity risks, and we note that in some sectors—notably energy—credit losses could yet mount up. But even after a 60bps spread tightening in October, U.S. high yield offers the potential for equity-like returns.
We do expect sentiment to gradually repair, and once the inventory drag clears and the current contraction in manufacturing stabilises—even if at a low level—we would anticipate some more encouraging headline GDP prints as the consumer’s resilience plays through.