Recession or stagnation?
On Friday, US GDP data for 2Q16 was released showing an expansion that looks ever more anaemic and unconvincing. Is this just the new normal in an era of stagnant global growth or is the US more perilously poised? To answer that question, imagine the US economy having two parts in the shape of “consumer GDP”, which represents about three quarters of activity, and the remainder being the nonconsumer “production” portion.
In order to obtain a clear view of the trends within these two economic segments the chart shows the real 12-month rate of change for each series, subject to a two quarter moving average. The data reaches back to 1958, allowing comparisons across multiple cycles. Right now, the key takeaway is that the non-consumer part of the US economy is in recession and has been for some months, while the consumer economy continues to register positive performance — the former is shrinking at -1.1% a year, while the latter is growing at about 2.5%. Such a divergence warrants the following observations.
1) Only once since 1958 has the non-consumer part of US economy shrunk without the period later being recognised as an official recession, and this was in 2012 when the Federal Reserve was in full monetary stimulus mode. By contrast, the Fed is now musing about raising rates and the US monetary base looks fairly well moribund.
2) Consumer spending growth must be considered dubious as the series is driven by items such rent and healthcare, which must be considered “enforced” consumer spending, leading to lower consumption of other goods and services. I would not be surprised if consumer spending (exrent and healthcare) has also fallen into contractionary territory.
3) The spread between the two series has seldom been higher and in the past this discrepancy has usually corrected by consumption going down rather than production rising. In fact, consumption, especially at the end of a cycle, seems to be very much a lagging indicator.
What this says is that the “production” part of the US economy is plainly in recession and historical precedent points to the broad economy going the same way. And in my book, contrary to the Keynesian doxa, production is far more important to economic growth than consumption.
As such, there was little in Friday’s soft GDP data release that was terribly surprising. What is unusual, if not especially startling, has been the anemic pace of US economic growth in this cycle, and on the other side the anemic rate of decline observed in these miserable growth rates. The key question is whether, at some point, the pace of decline accelerates, or instead does the US economy just maintain its slow crawl lower? In other words, is the US on the same trajectory as the Japanese, French and Italian economies in ending up in an ex-growth funk?
To put things even more succinctly: are we seeing the long term results of a Keynesian policy as simple stagnation? There is plenty of logic to such a proposal, but as an investor, I am left with the same “heads I lose, and tails I don’t win” proposition. Not an attractive outlook.