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Cyclical Long-Term Slowdown In U.S. Growth But No Recession


Summary

- GDP growth to stay 1.5%, long-term to 1%.

- U.S. job growth to stay at two-year low, languishing under 1.5%.

- Economic slowdown a major headwind for corporate earnings.

- No new business investment with slowing, downward economic growth.

Harlen Levy is H.L. and Lakshman Achuthan is L.A.

H.L.: What's your overall view of the U.S. economy from the latest indicators and data?

L.A.: First, the cyclical downturn in year-over-year payroll job growth that began a year and a half ago continues. For the last three months it's been unchanged from May's 26-month low of 1.7%.Yoy GDP growth has dropped to a 3-year low of 1.2%, and it'll stay under 1½% even if we get 3% Q3 quarterly growth.

Meanwhile, yoy industrial production growth has been negative for the last 11 months, while becoming less negative since hitting a 6-year low in December.

Also, back in the spring, yoy real income and sales growth hit their lowest readings in over two years, and they are still near those lows.

ECRI's U.S. Coincident Index, which is a broad summary measure of economic activity, has been locked in a clear cyclical downturn, and its yoy growth rate remains at a 2½-year low.

The bottom line is that this data shows we've been in a sustained slowdown, which is why the Federal Reserve hasn't been able to hike since last December. Since early 2015 its rate-hike plans have been on a collision course with the economic cycle.

That said, recall that in early 2016, when many were afraid of recession, ECRI declared that such fears were premature. Basically, it's been a cyclical slowdown in growth, but no recession.



H.L.: Do you see a September rate hike coming this month or in December, and if so, how might that affect the U.S. economy?

L.A.: If the Fed were truly data-dependent, there would be a straightforward answer to this question, based on my previous reply. But what they appear to be concerned about is stocking up enough rate-hike ammo for the next recession.

H.L.: What are the implications of the weak job creation we had in August, and do you expect a bounce back in September?

L.A.: The August jobs report is consistent with the growth-rate cycle downturn discussed above, with yoy payroll jobs growth staying at a 26-month low.

H.L.: How negative is the lack of business investment?

L.A.: It is a drag, for sure, and one that is no surprise. Why would you invest if growth keeps slowing, reducing the need for more capacity? We've been warning of the current weakness since last fall, and publicly updated that analysis in June, pre-Brexit. It will be hard for business investment to pick up until economic growth accelerates for a while.

H.L.: How do you rate corporate earnings this quarter, and what do you foresee the rest of this year and next year?

L.A.: As long as the economic slowdown continues, it will remain a major headwind for corporate earnings. We'll get more optimistic about earnings once we see a sustained reacceleration in economic growth taking hold.

H.L.: If Congress remains deadlocked and unable to act, how fatal is that to economic growth?

L.A.: On a near-term, cyclical basis, this is not fatal.

H.L.: What should Congress do to stimulate growth?

L.A.: This is the focus of a recent paper we published in Challenge, "Cyclical Misconceptions Driving Policy Errors: Clues to the Productivity Puzzle." No matter the proposed policy, it should be subject to a litmus test. Ultimately, only policies that genuinely address the challenges of demographics and productivity have a chance to succeed in improving long-term trend growth.

H.L.: Do you agree or disagree with any of the policies promoted by the Democratic and Republican presidential candidates?

L.A.: Both now seem to be in favor of infrastructure spending, which can certainly be a good thing if it's productive spending. Again, the point we make in our paper is that these policy proposals should be subject to this litmus test: Will they produce at best a temporary boost to growth, or will they actually improve demographics and productivity over the long term? Unless they do so, we need to accept that long-term trend GDP growth is converging to just about 1%, making it easier to slip into repeated recessions.

H.L.: How toxic is the situation in Europe?

L.A.: The politics have become increasingly problematic, but the good news is that even with global growth slowing. No major economy is ready to slide into recession just yet, and this is also true of Europe.

So, last June, the week before the Brexit vote and again right after it, when there was virtual unanimity among economists that it would trigger an immediate recession, we said it would not.

H.L.: Is the Middle East chaos so unmanageable that it seriously threatens the global economy?

L.A.: I don't see how the Middle East situation can really be stabilized in the foreseeable future, and that's just a reality we need to accept.

But the good news is that, in the years since the global financial crisis, global crude oil supply has grown, primarily due to a big increase in U.S. production capacity, while global growth continues to slow, capping oil prices at half the triple-digit levels we saw only a couple of years ago. That's many fewer dollars flowing out of our coffers to the Middle East. And even better, the U.S. is far less dependent on Middle East oil than it used to be, so our economy is less vulnerable.

The terrorists can really hurt us only if they can provoke fear and anger that makes us take our eyes off the ball, which is about improving our productive capacity that's key to our standard of living. Of course, the government needs to protect its citizens, but every dollar diverted away from productivity-enhancing investment, every safety measure that throws sand in the gears of our economy, hurts our long-term growth potential and generations yet to come.

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