It is very likely that the U.S. will see an extended period of slower Gross Domestic Product (GDP) growth (especially when compared to the past couple decades). The growth of the U.S. economy in the past couple decades has been supercharged by consumer spending. The spending in turn was fueled by increasing consumer debt loads and declining savings rates. I argue that this trend is over, and that there is no clear successor to take over where the consumer left off. Therefore, we should get comfortable with slower growth.
The Consumer
Chart #1, below, shows the contributing components of U.S. GDP. As you can see Personal Consumption Expenditures (PCE - consumer spending) is by far the largest part of GDP. This chart clearly shows how the increase in consumer spending has been carrying the U.S. economy over the past few decades. In 1981 the consumer made up just over 60% of the economy, now it’s over 70%. That is a very significant change, and a sign of our over-consumption in the past 30 years. It is also interesting how private investment (business investment) has declined rather significantly (more about that below).
The question is what will carry the U.S. economy in the next decade or two? Continued growth in consumer spending is very unlikely. The high level of consumer debt and low level of consumer savings (see my article on over-consumption at http://chartingtheeconomy.com/?page_id=56) don’t bode well for continued growth in consumer spending. In the near term neither does the increasing unemployment rate. Charts #2 and #3 below clearly show how consumers have taken on above average debt loads and are saving at a below average rate. Don’t expect the consumer to carry the economy in coming years as debt service ratios and savings move back toward average levels.
Business Investment
As Chart #1 shows private investment’s contribution to GDP (as a % of total GDP) has declined over the past few decades. In coming years I think it is also unlikely that private investment (business investment) will carry the U.S. economy. Why? Because there is a large amount of excess industrial capacity in the U.S. In fact capacity utilization in the U.S. economy hit a record low in March 2009, as Chart #4 shows. This means that businesses in the U.S. can greatly expand output without much additional investment. Therefore, business investment is unlikely to be the leading factor in GDP growth in coming years. For more on capacity utilization and industrial production (see http://chartingtheeconomy.com/?cat=16).
Imports/Exports
I also don’t think significant growth in U.S. exports will carry the U.S. economy in coming years. First, the rest of the world is also in an economic crisis of its own. Second, imports/exports are a very small portion of total U.S. GDP (see Chart #1). To significantly effect long-term GDP growth the U.S. import/export balance would have to dramatically change in coming years. I think we would need to see a significant decline in the U.S. dollar in the future in order for this to happen. This is increasingly possible with the run-up in the national debt. The problem is that a significant decline in the U.S. dollar would have its own set of negative side-effects (which would likely outweigh the benefits to exports).
Government Spending
Basically, this leaves us with government spending to carry the U.S. economy. Essentally, we are seeing the beginning of this with the huge expansion in government spending in recent months. The problem is that the government spending is leading to a serious expansion in our national debt, and, therefore, cannot be continued indefinitely. Chart #5, below, shows how the U.S. national debt is projected to grow in coming years. It also shows the national debt growing to 100% of GDP in the next couple of years. This is the highest level on record other than during (and immediately after) World War II. In the short term government spending will carry the U.S. economy. However, it cannot in the long term because of the effect it will have on increasing the national debt. As the national debt moves above 100% of GDP the potential for negative side-effects increases. These side-effects include destabilizing the U.S. dollar, and long-term inflation to name a couple. Therefore, you can count on government spending to carry U.S. growth in the short term, but I would not count on it in the long term. See more on the national debt at: http://chartingtheeconomy.com/?cat=7.
Conclusion
What does this leave us with? The answer is with slower GDP growth (at best) over the next decade or two. There will be some spikes upward in GDP in given quarters or years, but, overall, long-term GDP growth will slow when compared with the past couple decades.
Data Source:
> Chart #1: Bureau of Economic Analysis, Table 1.1.10. Percentage Shares of GDP.
> Chart #2: BEA, Table 2.1
> Chart #3: Federal Reserve
> Chart #4: Federal Reserve, G. 17.
> Chart # 5: Forecast data is from the Office of Management and Budget, A New Era of Responsibility Renewing America’s Promise, Tables S-1 and S-9.
>U.S. Treasury Department, Treasury Direct
> U.S. Bureau of Economic Analysis, Table 1.1.5.
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