Sunday, January 29, 2017

America According to GDP

I've heard many folks claiming the economy is doing great and we are on the verge of great things...so I thought I'd use GDP as a barometer to gauge the strength of the economy.

First, real (inflation adjusted) annual GDP growth since 1950 (chart below).  2016 was another disappointing year for economic growth, as measured by GDP.  The trend downward is plain to see.
In dollar terms, GDP growth peaked in 2005 and has been decelerating since (chart below).Not coincidentally, US total energy consumption also essentially peaked in '05, with energy consumption down some 3% over the last decade.  Chart below shows annual change (blue columns) vs. total consumption (brown line).Which seems to have everything to do with the cessation of growth among the US 25-54yr/old working population (below).Because the chart above is so critical to understanding why interest rate cuts and un-repayable levels of debt are deemed "necessary"...the change per period in the federal funds rate, 25-54yr/old employees, and total federal debt, (below).  The miniscule growth of only 200k net jobs since 2000 among the core US population, a population of 126 million that made up 75% of all US employees as of 2000, explains why those reliant on consumer growth are in very big trouble and why central bankers have come to the fore.
Just to finish this thought...the chart below shows which age segment saw all the job gains since 2000...But seems unfair to judge GDP without also seeing the increasing and corresponding growth in federal debt (below).The chart below subtracts the annual growth in federal debt from the annual GDP growth (actual Treasury department debt data...no the oft cited but gamed federal "budget deficits").  Since 2007, federal debt growth has outpaced GDP growth every year but 2013.To more fully illuminate the scene, the chart below shows annual total credit growth (federal and private, columns) versus GDP growth (black line).  The systemic deleveraging in '09-->'11 is clear with the increase in federal debt attempting to maintain semblance of growth.  However, private debt growth is still nowhere near the levels seen in the early and mid 2000's...and likely never will be...the federal government will have to do the heavy lifting from here on.In brief, GDP growth per period vs. debt growth (broken down by private vs. federal).  The '08-->'16 reliance on federal debt to maintain growth clearly visible.
Below, the breakdown of debt, by type, in each period.  If it weren't for huge increases in student loans and car loans, the consumer debt would be hugely negative in the most recent period and there would be nothing (net) but federal debt.
The more conventional, federal debt to GDP...still rising.

Total debt to GDP...down about 35 basis points but not really falling any longer.
Just for fun, the Wilshire 5000 (representing all publicly traded domestic equities) divided by GDP (again, the FFR for reference).  On the basis of the relative size of the economy (GDP), equities valuations are completely off kilter with the underlying economy...way beyond the bubbles of '00,  '08 and the comparative pipsqueak bubble of '87.
And it follows that if we take GDP and divide by the US household net worth, not since WWII or well before has US net worth been so far removed from the underlying economic activity.
WHY?
Check the chart below showing annual US 20-64yr/old population growth (blue columns) vs. federal funds rate % (black line).  The adult population annual growth peaked in 1979 adding 2.4 million adults to the US economy, nearly coincident with the Fed's FFR peak.  The adult population growth equaled the high water mark again in 2000 at an annual increase of 2.3 million.  However, the annual adult population growth falloff since 2000 has been rapid...growing only about 600k in 2017.  This is a 75% decline in the annual pool of new car buyers, new home buyers, potential new employees, potential taxpayers.  And in the best case (shown below) the adult population growth will fall by another 50% to just 300k/yr by 2025.

However, if the adult population growth is seen as a percentage, the annual growth of the adult population can be seen to be driving the Federal Reserves' interest rate setting...and why any rate hikes in the short term will be rescinded by lower rates...quite likely moving into negative interest rates (chart below).

The slowing population growth and declining interest rates have incented the federal government to take on more debt than can ever be repaid or serviced except at extremely low interest rates (below).

For those curious how the global population and demographic picture looks...HERE you go but it is significantly worse off than the US.  However, one chart to show the global population growth (excluding Africa).  Global population growth peaked in the late 1980's and has been decelerating since (now down by 33% from peak).  However, the make-up of that growth has nearly entirely turned to 40+yr/olds living longer vs. a growing population of young (population longevity vs. population growth)...and the estimates are clear and adamant, population growth outside of Africa is shifting to 40+yr/olds and particularly to 65+yr/old populations living longer while populations of young rapidly contract.

Back to America, the chart below shows the minimal impact total US debt is having on creating net new employment...and the cost of doing so.
The last chart shows the flood of federal debt apportioned per the nearly 100 million US 25-54yr/old employees (red columns) vs. the non-growth in wages shown by the real median household income (green line).  America played credit card roulette and 25-54yr/olds, you lost so get ready, because the bill is coming..
Conclusion:
Without the population growth (which represents the growth in consumers), things are bad economically and only going to get worse...which is why things are "great" financially...and things are so bad economically that the emergency financial policies that never really ended will soon need to be redoubled and federal debt growth further accelerated just to keep the bottom from falling out.  Some understand this sure economic deterioration is, and will likely continue to be, the impetus for the greatest bull market in history...even if it is for all the wrong reasons.  Sadly, this bull is simply leading to calamity.