Published on November 29, 2013
Since the start of the current recovery, we have made the case that the economy would grow at a slower pace compared to most other expansions in recent memory. The consumer factored prominently in this outlook as they embarked on a long overdue period of balance sheet repair. Corporations would have little reason to invest if consumer growth was weak and large fiscal deficits would limit the ability of the federal government to contribute to growth.
The question now: whether this outlook should be maintained, or if it needs to be updated to reflect a new, higher or lower, economic growth projection? We have outlined the key GDP growth drivers – consumer spending, corporate investment and government spending – to determine whether the current outlook needs to be updated.
Consumer Spending
The consumer has shown steady progress towards a return to health, but it may be a while before they return to 100%. Without the unlikely return of last decade’s debt-fueled spending, income growth will be the key to consumption growth going forward. Some key facts to consider:
- High levels of unemployment and slow job growth are causing a lag in consumption growth relative to historical recoveries
- Income growth will be a key factor for consumption growth is to accelerate from here
- Wage trends and wage growth remain weak relative to other economic expansions; though it is possible we may start to see hints of modest improvement in nominal wages growth, as a result of a tighter labor market in certain pockets of the economy.
Corporate Investment
While the consumer has struggled to make up ground lost in the last recession, U.S. corporations have thrived. Corporate profits have soared to new all-time highs. Metrics such as industrial production have performed in line with historical economic recoveries. The severity of the ’08-’09 recession has promoted many trends in companies re-evaluating their bottom line:
- Compensation as a share of corporate GDP is at its lowest level since the mid 1940s
- With consumers in retrenchment mode and concerns about growth abroad, companies have been reluctant to expand
- Uncertainty over government policy remains a signficant concern for many companies, and the recent budget and debt ceiling showdowns did little to help these fears
Government
Although we do not see the federal government as a meaningful “swing factor” in either direction for economic growth, it is likely this will continue be a modest drag on GDP growth next year, as various programs continue to expire and expectant tax changes. Despite the improvement in the budget deficit, the federal government still has a record amount of debt, which will continue to hamper federal spending. Several key factors:
- Since the end of the recession in June 2009, government has generally been a headwind to growth in terms of direct investment and consumption
- Government related employment experienced significant declines – especially at the state and local levels, which generally must balance their budgets annually
- Improving tax receipts have helped to improve the local governments, and they are beginning to hire again, a sign that the retrenchment for the local level might be past us
History has shown that if a recession occurs in tandem with a financial crisis. the following recovery tends to be significantly weaker than those which follow recessions without a financial crisis. This has certainly been the case following the last recession and the global financial crisis. During the past four years, there has been significant improvement in the consumer’s balance sheet and corporate profitability has reached new all-time highs. The good news is that there are few signs of excess or extremes in today’s economy, suggesting that there is little risk of the current cycle collapsing under its own weight.
Nevertheless, ongoing slack in labor markets is a significant headwind to income growth, and uncertainty continues to weigh heavily on business owners and consumers alike. The weight of the evidence continues to suggest that the economy will remain on a low growth trajectory, though we will continue to monitor for alternative outcomes.
You can read Manning & Napier’s full article on the Economic Cycle Update here.
© Manning & Napier
