Tempering US Economic Growth Expectations

Listen, before we go through a litany of economic charts that pour some cold water on the recent bout of optimism regarding US economic growth prospects we want to stress that we don’t believe economic growth is about to fall off of a cliff. Quite the contrary, we feel that we are on the same “muddle-through” growth trajectory we have been on for the entirety of this recovery. We do, however, question the sustainability of the move back in bond yields because of better “economic data” and are surprised by the number of recent articles highlighting increased inflation fears since the presidential election. Much of the recent optimism seems to stem from a the belief that the new administration will be able to dramatically (and immediately) increase economic growth. The problem is that the US and global economy continue to face major structural issues that seem to be beyond the control of any politician. Increasingly, it is feeling like we are in a “buy the rumor, sell the news” kind of market.

Let’s start with the punchline: US 4Q2016 GDP is forecasted to be a whopping 4 bps higher than 3Q2016 GDP on a QoQ% basis and 1Q2017 GDP is forecasted to be 5 bps lower than 3Q2016 GDP on a QoQ% basis according to now-casting.com. Simply put, we continue to be stuck in the 2%-2.5% growth trajectory of the last 7 years. Currently the data feels stronger because of the the cyclical slowdown in 2015 (which by the way also happened in 2011 and 2013) so the period over period comparisons are easier to beat.

Since 1946, US real GDP has grown at an approximate 3.2% annual growth rate. In order for the recovery that has occurred since 2009 to accelerate to just a 3% annual growth rate real, GDP would have to grow by 5% annually for the next 14 quarters! We have had only one 5% annualized quarter in this recovery (3Q2014…rounding up to 5% from 4.96%) and the last time real GDP grew by 5% on a year-over-year basis was 2Q2000. And for the last depressing statistic on the history of real GDP growth, the last time we had four consecutive quarters of 5% year-over-year real GDP growth was from 1Q1984-1Q1985. Slower growth is a structural phenomenon that will be hard for any one person or one administration to meaningfully change.