Friday, January 12, 2018

Contemplations on America and 4% GDP Growth

Economic prognosticators (Jamie Dimon, among them) suggest that 4% GDP growth is likely and that economic good times have returned.  I haven't a clue what they are smoking.  I'll lay out how the US economy has grown ever more reliant on cheap debt to buy ever more intangible services creating a decelerating number of full time jobs among a population that is growing ever more slowly (the basis of a growing consumer base).  And that's just scratching the surface.

To provide some context, the chart below shows the Federal Funds Rate (black shaded area) versus the annual change in federal debt (red), consumption (yellow), government consumption (blue), and private investment (white).  Noteworthy since the GFC is the surging annual change in consumption versus tame growth in government spending and decelerating private investment.  BTW, since '81, a rising FFR % coupled with decelerating federal debt growth (as we now have) has resulted in declining private investment and imminent recession.
America the Service Economy:  Since 1960, consumption as a percentage of GDP has risen from 60% to nearly 70%, as of 2017.  However, the make up of the three components that comprise consumption has drastically changed (chart below).  Durable goods (those deemed to last 3+ years) has been steady at about 8% of GDP while non-durable goods has nearly fallen in half.  Conversely, services have risen from just more than a quarter of the total economy to nearly half of total GDP!  A service is a type of economic activity that is intangible, is not stored, and does not result in ownership.  A service is consumed at the point of sale.  So America is an economy where nearly half of all spending results in nothing tangible or durable to show for it...except more debt to be serviced?!?

Looking at the year over year quarterly change in the components that make up consumption in dollar terms, the pre-eminence of growth among services is obvious (chart below).  Particularly interesting is the disconnect of accelerating growth among services versus decelerating growth among durable and non-durable goods post the GFC.

And it is those reliant on these services that are feeling the surging inflation in the cost of these services.  Whether it be education, insurance, healthcare, or just a haircut...prices of services (47% of the economy) are skyrocketing versus fairly tame inflation among the 22% that represents "goods" (a computer, a car, a pair of pants).

So what?  Well, an economy that is reliant on debt (cheap debt) to purchase intangible services (an activity with no asset to show for it) is an interesting concept.

Perhaps this transition to a service economy is as responsible for the breakdown in full time employment as anything?  As the chart below shows, despite the significantly larger population and gross domestic product, the economy has been consistently producing a decelerating number of full time employees for decades...but the current ten year period is particularly ugly.  Despite a new peak in employment and asset prices, the net creation of full time employment over the past decade is less than a third of that seen almost five decades ago.

Viewed differently, the chart below shows total full time employees (stock) blue line and the year over year change in full time employees (flow) in yellow.  What should be clear is the current period has seen full time job losses magnitudes greater than any previous recession but the subsequent recovery in full time employment has actually been sub-par to those of previous recoveries.

Or on a percentage basis, the decelerating growth in full time employment is easier to see.  Lower highs and lower lows (chart below).

How GDP can supposedly grow at 4% while the growth of the quantity of those capable of consuming more is growing at less than a third of previous periods and the quality of real wages are stubbornly flat...truly a mystery?

But asset prices are amazing and the market must be telling us all is well?  Perhaps but if gauging the Wilshire 5000 (representing all publicly traded US equities) against the annual net change in full time jobs against...(chart below), something is amiss.
When looking at the same full time employment growth as above but on a percentage change basis...decidedly not good (chart below).  Lower highs and lower lows for full time employment growth...however, quite the opposite for asset appreciation as the current equity market is equivalent to the '00 and '07 bubbles... combined.

Not to mention the now declining 15-64yr/old US population, surging debt to GDP, and Federal Funds rate still barely off the zero bound (chart below).
Lastly, as total US population growth has slowed nearly 2/3rd's (as a percentage) from peak '50's growth...and as noted above, the portion of the population growing is now primarily or possibly solely among the 65+yr/old cadre (those that earn and spend about only 2/3rds those in the working population)...the best barometer for what a bubble we are in is the household net worth as a percentage of disposable income...moving off the charts (below).

Conclusion:  So, a nation growing ever more slowly, an economy growing ever more reliant on utilizing debt to buy intangible services that creates fewer full time jobs is the stuff of the greatest bull market in history.  Phewwww, nothing to worry about here!!!

Plus, those concerned that inflation may be just around the can rest easy... outlined HERE.  Nothing to worry about but more central bank created stagflation, surging service related expenses, and the further expansion of the greatest asset bubble in human history.