US economic growth is weak when compared to historical post recession growth rates – just look at the depth of the downturn and the peak of the uptick.
It has yet to rebalance away from PCE led growth: over the year (2011) the private consumption expenditure component of GDP represented some 80% of GDP growth, while net exports have detracted from growth. Problems in Europe and weakening growth in China would appear to limit growth options here.
Debt remains high for many reasons: it is likewise is expected to detract from growth going forward.
If consumer credit growth is close to peaking in the current cycle, then we may be in trouble. Indeed, take out debt financed growth and today’s real growth rate is probably not that low at all, and do not forget, what little growth we have is being forced to a certain, if not great, extent.
Add to this a still weak housing market, weak income fundamentals and still very high unemployment, and wealth driven debt factors (mortgage debt) may also be absent as a key driver of real GDP growth going forward.
So where is the growth going to come from? This may be a good question when we consider that warm winter weather may have helped economic growth over the last 3 months.
If we cannot rely on the consumer, debt, overseas markets and the government, then what of investment: gross fixed private investment can act as both a drag (too much historic investment in unproductive assets) or a boost to growth as capital is reallocated: but for such to be a boost we need capacity constraints and strong demand fundamentals.
But in order to invest, we need to save:
If growth dynamics are slowing before the economy has gone any significant way towards reducing a serious debt overhang and high levels of unemployment, let alone remedying significant structural economic imbalances, then it is a question of when the forces acting against recovery gain the upper hand. The economy appears to lack the necessary momentum to carry its weight going forward.
In order to meet our liabilities going forward and to generate the growth in output needed to justify current asset valuations, we need stronger and sustained growth. Asset values, in a post excess asset focussed money supply growth binge, are key to keep the whole edifice together. But there is only so much we can do with QE without destroying the integrity of the system itself.
Inertia – the real (non influenced) growth rate of the global economy is much slower than we have seen over the last few years, and as the force of efforts made to bolster growth weaken, we are more likely to move back to a slower rate of growth, but not without a shock/adjustment needed to register the difference between the energy of the two paradigms.
I would like to take many of these issues further in a Capitalism in Crisis recap, because their number and their importance is more meaty than this short ad lib.
Data is sourced from the US BEA, Census Bureau and Federal Reserve.