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Tempering US Economic Growth Expectations

Tempering US Economic Growth Expectations thumbnail

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 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.





The real growth pickup going on in the world is actually occurring in Europe as 4Q2016 and 1Q2017 GDP is projected to grow at the second and third strongest QoQ rates since 2011. Europe is projected to grow at roughly 2% annualized growth but this is good step up from the roughly 1% growth rates of the last several years. Surprisingly, German 2-year bond yields just broke to an all-time low as growth prospects seem to be improving at the moment.



Shifting back to the US, higher interest rates are just not sustainable since debt to GDP has increased significantly over the past decade. As we laid out in an interim quarterly strategy update last week, the US government has paid slightly less interest expense over the past 12 months than it did in 2007 even though total debt outstanding as a percentage of GDP has increased from approximately 65% to 105% (debt held by the public increased from 40% to 75% of GDP). A sustained period of higher interest rates will dramatically eat into the government budget at the expense of many other spending programs.


Infrastructure spending seems to be one of the primary drivers for the recent bout of enthusiasm. The proposed $1 trillion increase in US infrastructure spending by the government over the next decade is really just a drop in the bucket compared to what is already going on in the private sector and in China. Over the past five years, China has spent over $20 trillion in fixed investment while the US public sector has spent just $1.3 trillion. Fortunately, the US private sector has picked up the slack and has invested over $13 trillion over the past five years.


There is also a lot of hope that lower tax rates could spur consumer spending propelling the economy out of the “muddle-through” growth rates experienced in this recovery. Without even discussing who will be the primary beneficiaries of lower taxes, a major issue with this argument is that the behavior of the consumer has changed since the financial crisis. Consumers are simply saving more of their disposable income. In the chart below we show a predicted savings rate based on the amount of consumer credit as a percentage of disposable income. The current savings rates is 5.7% while the predicted savings rate is 2.8%. Since the financial crisis, and especially since 2012, consumers are not leveraging up their personal balance sheets as their disposable income increases. The scars of the financial crisis may have permanently changed the behavior of the US consumer. Consumers are entrenching similarly to how they did in the 1970’s. The problem today is that the savings rate is at 5.7% while the savings rate in the 1970s was closer to 12-14%. This limits the upside of an acceleration in economic growth even if all of the sudden the consumer decided to begin spending more and saving less like they from 1980-2007.


Finally, let’s touch on inflation. An immediate major inflationary scare doesn’t seem to be in the cards. Core inflation during the recovery is running well under 2%. If you strip out shelter as well, inflation has really tailed over over the past three years. Additionally, there is still a measurable output gap in the US. This suggests that inflation is not a here and now problem as there still seems to be slack in the economy. Our CPI diffusion index is also near recessionary lows and our measure of structural inflation is still clearly in a downtrend. The long-term decline in structural inflation seems to stem from demographic problems and those problems don’t seem to be going away anytime soon. All in all, their seems to be an anchor holding down inflation due to excess capacity and changing demographics in the economy.





The US economy is coming out of a cyclical downturn and recent economic data is feeling better because of it. While the effect of the policies put in place by the new administration (and what the actual policy will ultimately be) is still unknown, there are major structural issues facing the economy that may limit the effectiveness of any policy changes. The US economy continues to grow at same pace that it has over this entire recovery. However, neither a major increase in economic activity nor a significant deceleration in the economy seem very likely over the coming quarters.

Gavekal Capital blog

21 Comments on "Tempering US Economic Growth Expectations"

  1. Apneaman on Sat, 26th Nov 2016 4:09 pm 

    I feel so privileged to be alive when the world decided debt no longer matters.

    Now it Begins to Unravel

    The Credit Bubble Peak was Marked by “Totally Crazy Lending.

    “Debt is good. More debt is better. Funding consumer spending with debt is even better – that’s what economists have been preaching – because the consumed goods and services are gone after having been added to GDP, while the debt, which GDP ignores, remains until it is paid off with future earnings, or until it blows up.

    Corporations too have gone on a borrowing binge. Unlike consumers, they have no intention of paying off their debts. They issue new debt and use the proceeds to pay off maturing debts. Funding share-buybacks and dividends with debt is ideal. It’s called “unlocking value.”

    Debt must always grow. For that purpose, the Fed has manipulated interest rates to rock bottom. Actually paying off and reducing debt has the dreadful moniker, bandied about during the Financial Crisis, “deleveraging.” It’s synonymous with “The End of the World.”

    At the institutional level, “debt” is replaced with more politically correct “leverage.” More leverage is better. Particularly if you can borrow short-term at near zero cost and bet the proceeds on risky illiquid long-term assets, such as real estate, or on securities that become illiquid without notice.

    Derivatives are part of this institutional equation. The notional value of derivatives in the US banking system is $190 trillion, according to the Office of the Comptroller of the Currency. Four banks hold over 90% of them: JP Morgan ($53 trillion), Citibank ($52 trillion), Goldman ($44 trillion), and Bank of America ($26 trillion).”

  2. DMyers on Sat, 26th Nov 2016 6:20 pm 

    I contend that the stated inflation rate, 2 %, is greatly understated. If that is the case, there has been no real growth during the periods under consideration.

    We have entered a new era where the elements of growth are not sufficient to make it happen. Something other than debt and the prison population has to be growing before there can be economic growth.

    In short, economic growth is a culmination, a reflection, a by product, and a multiplier of other kinds of growth (e.g. population growth). I’m not going into the whole science of growth topic. I’m only saying it’s a complicated situation, but the outcome is so simple that a child could explain it. What goes up must come down.

  3. onlooker on Sat, 26th Nov 2016 6:28 pm 

    I feel so privileged to be alive when the world decided debt no longer matters.— A subliminal way of saying the future no longer matters. Myers its all going down because all of it was and is unsustainable. Too bad in the process we basically are rendering this planet unfit for existence except for perhaps simple organisms. Mankind a destructive force of nature.

  4. makati1 on Sat, 26th Nov 2016 7:01 pm 

    Onlooker, I too feel privileged to be alive at the end of the story of humanity. Looking at the headlines of the new articles posted here, I see the reason(s) in bold letters. Ignorance. Stupidity. Greed. The ‘intelligent ape’ doesn’t seem so intelligent when you look at him close up and with an open mind.

    There is no hope that even a few remnants of our species will survive 2100. The years between now and then will be filled with grief, pain and suffering only the poorest of the 3rd world have known. Death will be our constant companion.

    The unfolding of the end is not fun to watch, but trying to ignore it will not make it go away in our lives. The best we can do is use our resources to ease the pain as best we can and ride it out to the finish. Whether the ride is short or long, you can be sure it will be bumpy. Buckle Up!

  5. Apneaman on Sat, 26th Nov 2016 7:49 pm 

    Not the rush to the exits I have predicted, not yet, but some are out of their seats and looking for the exit sign. Won’t be long now.

    Perils of Climate Change Could Swamp Coastal Real Estate

    Homeowners are slowly growing wary of
    buying property in the areas most at risk,
    setting up a potential economic time bomb
    in an industry that is struggling to adapt.

    “Some analysts say the economic impact of a collapse in the waterfront property market could surpass that of the bursting dot-com and real estate bubbles of 2000 and 2008.

    The fallout would be felt by property owners, developers, real estate lenders and the financial institutions that bundle and resell mortgages.”

    “Some residents will cash out early and suffer minimal losses,” he wrote. “Others will not be so lucky.”

  6. onlooker on Sat, 26th Nov 2016 7:51 pm 

    Yes Mak better to face reality than hide from it, no matter what that reality is.

  7. DMyers on Sat, 26th Nov 2016 8:35 pm 

    “Mankind a destructive force of nature.” says Onlooker. (26th Nov 2016 6:28 pm) I’d like to play Socrates with that assertion.

    S: When you say this to mankind, you intend something negative.

    O: Yes

    S: When you say mankind is a destructive force of Nature, you’re saying mankind’s nature is to be destructive.

    O: hell yes

    S: If mankind’s nature is to be destructive, then isn’t it true Nature must have created mankind to be what it is, destructive?

    O: I don’t know. Yes, that must be true.

    S: The purpose of mankind, as a mandate of Nature is to be destructive.

    O: yes!

    S: Then mankind plays its destructive role and destroys Nature as an agent of Nature. In order to serve the course of Nature, we must endorse mankind as a destroyer.

    O: No, I didn’t say that!

  8. Sissyfuss on Sat, 26th Nov 2016 8:35 pm 

    The Ponzi’s still good today, check back tomorrow.

  9. Lucifer on Sun, 27th Nov 2016 3:21 am 

    When the world does finally collapse and a new hell on earth is born. For the people that do survive, don’t worry. I will be here to clean up the mess and turn it into a new paradise.

  10. peakyeast on Sun, 27th Nov 2016 3:44 am 

    @DMyers: Thanks for a good laugh !!

  11. onlooker on Sun, 27th Nov 2016 4:11 am 

    Myers, what I meant to say is Mankind can potentially be akin to a destructive force of nature particularly with the modern technology at its disposal. But I could just as easily say we have been as witnessed by the Sixth Mass Extinction Event which we have been instrumental in advancing and by the overall damage we have and are doing to the Biosphere and destabilization of the climate system.
    So in whatever way you parse my comment it is a pretty accurate assessment of what we can do and have done

  12. Davy on Sun, 27th Nov 2016 5:23 am 

    If, you step out of your dualistic nature and look at nature as in unity and harmony then you see man for what he is. Mankind is indeed a destructive force in nature as is any other species when placed in a particular situation of overshoot. Man is an exceptionally destructive force and can be termed an extinction species because of his large brain and the dualism of his ego. Man can separate himself from nature and himself in destructive fantasy and superstition. Humans can do as modern man has done and build an elaborate system of self-advancement without regards to the planet’s health. He can make judgments and assumptions that his way is the right way. You know, God said it so it must be so. Who heard that God said it? Yea, a man heard God said it and on and on. He can use skydaddies and or the nonbelief of skydaddies as reasons for this. Yes, Atheist are fucked up too.

    The “Ecos” could give a shit. For the “Ecos” we are doing exactly what we are supposed to be doing so any of you whining about how bad humans are then are pissing in the wind. Yes, on one level within man’s prison of his dualism of self-reflection this does matter. We are creatures who through duality use good and evil as our guide. What is worse we have emotions and we have reason in play. Combine those and you have one crazy cocktail. In this respect being destructive does have ethical and moral connotations. In our own little human world that is just a huge anthill we have our own unique reality but don’t think that is reality. Sorry, we are many levels divorced from reality because of a big brain. A virus is reality not humans.

    On a higher level it does not matter in the least to the “Ecos”. Life is all about extinction and evolution. These life forces function in a frequency and that frequency is nonnegotiable so quit trying to play God and assume you matter. If you are feeling depressed man is so depraved realize outside of human reality it does not matter.

  13. Cloggie on Sun, 27th Nov 2016 5:32 am 

    A less negative interpretation of man is possible than merely defining him entirely as a destroyer. The destruction of the planet is not intentional but a negative side effect of economic activity and many people, even those in power, are well aware of it. And we, the posters on this board, are almost all situated at the pinnacle of the global consumption pecking order.

  14. makati1 on Sun, 27th Nov 2016 5:41 am 

    Human kind has not lived in harmony with nature since he stopped being a hunter-gatherer. The years since have been a relentless, aggressive attack on nature in the name of greed. It was only a bit in the beginning, but as he realized that nature could make him wealthy, the greed became obsessive. It has been nothing but a continuous rape of the land ever since. Especially in the West.

    Yes, many of the world’s native tribes had lived in harmony with nature, but how many of them are left? The Europeans have wiped them out over the centuries, in the name of building empires. Now America is finishing the job in most 3rd world countries that will not bend the knee to the Imperial City.

    Too many people or too much waste? Too bad there will be no historians in the future to document this end of the species. Ah well…

  15. Davy on Sun, 27th Nov 2016 5:43 am 

    So said the ant to the grasshopper as he was stuffing the last blade of grass in the field down his ant hole…lol

  16. Davy on Sun, 27th Nov 2016 6:03 am 

    “Especially in the West.” LMFAO over a dumbass. The worst industrial destruction ever witness by man is taking place in Asia. Rich Asians are finishing off their own sustainable populations and raping the last bits of nature globally for their own consumptive desires. Look in the mirror and grow up. “Anyone have any shark fins or rose wood?” said the China man.

  17. onlooker on Sun, 27th Nov 2016 6:32 am 

    Good comments guys. Indeed, I myself am not defining Mankind as simply destructive but simply as potentially a very destructive species. Part of the problem is precisely our intelligence which allowed us to step out of the bounds of the limitations that Nature places on all creatures. So with our ingenuity and cleverness we have further and further defined natural limitations. At this point our other vice has been our emotions and urges which then gave us the cue to assemble and maintain this huge Economy and relish in the modern lifestyle. Even as we showed little wisdom in not seriously attempting to control our population. So we are victims of both our intelligence and our emotional proclivities.

  18. onlooker on Sun, 27th Nov 2016 6:33 am 

    further defied natural limitations

  19. Cloggie on Sun, 27th Nov 2016 6:58 am 

    Human kind has not lived in harmony with nature since he stopped being a hunter-gatherer. The years since have been a relentless, aggressive attack on nature in the name of greed. It was only a bit in the beginning, but as he realized that nature could make him wealthy, the greed became obsessive.

    Why don’t you go living in a tree, “in harmony with nature”? Believing in the “noble savage” myth again, aren’t we? /sarcasm-off

    Ah I already know… can’t take off your European white skin as if it were a t-shirt, eh.

    Yes, many of the world’s native tribes had lived in harmony with nature, but how many of them are left? The Europeans have wiped them out over the centuries, in the name of building empires.

    Give me the name of a single larger tribe that was wiped out by the Europeans. For being wiped-out, “third-worlders” today are pretty numerous. There is a distinct unwhiped-out quality about them.

    Trust me, “third-worlders” prefer to acquire their frozen chicken from a super-market, just like you, rather than chasing one, “dressed” in a silly naked butt.

    These darned Europeans, better off without

  20. makati1 on Sun, 27th Nov 2016 7:03 am 

    Cloggie, at least I know real history, not the propaganda pumped out by the West over the last century. And, yes, the world would have been a lot better off without the Europeans over the last 500 years, including today.

    The Europeans wiped out millions of native Americans over a few hundred years, for a start. Then you can go to Africa where they traded slaves for sugar. Wiped out the Central Americans for their gold. And on and on.

  21. Sissyfuss on Sun, 27th Nov 2016 1:53 pm 

    Man is for foremost an animal, a mammal. His evolutionary directive is first to survive
    followed closely by the new to breed. The easy road to survival is wipe out all your natural enemies be they apex predators or bacteria. My sister always proclaimed it’s Darwinian, that if the cockroaches had the big brains and the opposable thumbs they would be wielding the AR-15s. I don’t find us evil as much as greedy and arrogant; self imagined gods whose power went not only to our heads but reorganized our brains. And now enertia is a bitch!

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