Why is the economy moving so slowly?
There’s no question that economic growth has slowed. Over the past decade, the US economy has grown about 1.5% per year. The decade before that, it grew 3.4%, before that, 3%, and so on. What could account for poor performance?
A big part of any economy is labor growth. If there aren’t enough workers, the economy can’t grow. For all the talk about robots and self-driving cars, we still need people to build roads and write software and grow food and manage investment portfolios. One way to look at economic growth is simply the growth of the labor force plus any growth in productivity – output per worker.
Source: JP Morgan
And the labor force hasn’t been very growing much over the last 10 years—less than any decade since World War II. A big part of the problem has been putting the right workers in the right jobs. A couple of economic analysts looked at labor market growth in 21 countries over the past 40 years and found that the problem wasn’t post-crisis malaise, it was the credit boom that has been the problem.
Booms tend to undermine both labor growth and productivity growth. Workers shift over to a lower-productivity sector as the boom is occurring. Businesses are starting up, loans are growing, whole areas of the economy seem on fire. But the businesses they leave can’t find workers—they’re all going to the new area. In the US that was real-estate in 2004-2007. Then, after the inevitable bust, people are thrown out of work and have to get back to their former lives. Only their former employers have moved on. Technology or trade or outsourcing has enabled many companies to do more with less—and it takes a long time to find work again.
Source: Calculated Risk
That’s why the recovery from prior recessions took much less time. There was less misallocation of workers – There was simply an economic downturn that was followed by a recovery. But in the two most recent recessions a bubble distorted the economy, and the post-bubble credit crunch made it much harder for people to find work again. This is exacerbated by technological trends.
The good news is that our current economic funk isn’t a permanent shift. The economy seems to be stagnating, but a big part of that is the hangover from two big booms. The further we get from those bubbles, the more normal our economy will seem. Second, it’s no surprise that low interest rates aren’t helping the economy very much. Monetary policy is a pretty blunt instrument when it comes to reallocating resources. And low interest rates helped fuel the housing bubble in the first place.
It’s not the economic bust that plagues our economy. It’s the boom that plants the seeds for its eventual collapse—and hurts both productivity and growth of the labor force.
Douglas R. Tengdin, CFA
Chief Investment Officer