Stealth Stagnation: Why the U.S. Economy Is Not as Robust as You Think
The prevailing narrative about the U.S. economy is that it’s ‘resilient’: despite rapid rate hikes, economic growth has held up and may even be accelerating. Yet looking back, we see a different picture: stagnation that’s gone largely unnoticed thanks to measurement issues and a misleading cyclical view of the labor market. Let’s unpack that.
On a broad measure of activity, the U.S. economy has basically flatlined since the end of 2021, growing less than 1% in total over the period – the weakest 18 months ever seen outside a recession. See the Growth never so weak outside the recession chart.
What is this broad measure? It’s an average of two ways of measuring economic activity.1 One (GDP – Gross Domestic Product) adds up total spending by households, businesses, government and on exports; another (GDI – Gross Domestic income) adds up incomes and profits of households and firms.
In reality, the two should match. But no measure is perfect and gaps sometimes open up between them. Right now, the measured level of GDP is very high relative to GDI. GDP says the economy has grown by 1.9% in the past 18 months. GDI says it has contracted by 0.5%. Statisticians can’t find the income to match their estimates of spending. See the Flatlining activity chart.
Both measures can be revised over time. GDI might be revised up if more income is found. We expect a small upward revision to GDI due to changes in the way the Fed’s interest income on its past asset purchases will be recorded. But we also think it striking that consumer spending is measured to be so much higher than implied by reliable sales tax revenues, so it’s quite possible that estimates of GDP get revised down. The truth is probably somewhere between GDP and GDI. Research from the U.S. Bureau of Economic Analysis suggests the average of GDP and GDI is the most reliable guide to what’s really going on – a view shared by the NBER committee that judges when the U.S. has gone into recession.
The gap between the measures tends to be wider in volatile times. It was last this big just before the recession in the Global Financial Crisis of 2008. See the Wide gap between measures chart. Fed research suggests GDI is better at flagging when the economy is about to take a turn (for the better or the worse) – which could speak in favor of putting even more weight on it.
How has stagnation gone under the radar?
Partly because the GDP data come first and tend to set the tone. But more importantly: the creation of nearly 7 million jobs – not normally a sign of a weak economy – is misleading people, we think. In a typical business cycle, stagnation would be associated with job destruction.
But this is not a business cycle. Around 15 million jobs were cut almost overnight when the pandemic hit and the economy shut down. Companies have been hiring back as activity restarted, and 18 months ago they were still 7 million short of finishing that process.
Against that baseline, jobs have actually been destroyed. And that’s even clearer when we account for the fall in the number of hours each employee is now working – that’s equivalent to losing more than half a million jobs since 2021 and takes overall job gains down closer to 6 million in an economy that would have had to add 7 million jobs just to get back to square one.
Seen in this context, recent job numbers are far from a sign of economic strength – like the GDP/GDI average, they reveal stealthy stagnation.
1 There are three ways that an economy’s total activity can be calculated: by adding up spending on goods and services (the expenditure approach); by adding the total value of output produced by business, household and government (the output approach); and by adding the incomes received by households and firms (the income approach). In the U.S., gross domestic product (GDP) generally refers to the expenditure approach. The output approach is typically reconciled with this, making the two measures equal. The income measure — called gross domestic income — can differ from GDP (even though they’re trying to measure the same thing – total activity) and the gap is called the statistical discrepancy.
FOR PUBLIC DISTRIBUTION IN THE U.S., UK, EUROPE, SOUTH AFRICA, ISRAEL, CANADA, LATIN AMERICA, HONG KONG, SINGAPORE AND AUSTRALIA. FOR INSTITUTIONAL, PROFESSIONAL, QUALIFIED INVESTORS AND QUALIFIED CLIENTS IN OTHER PERMITTED COUNTRIES.
General disclosure: This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date shown above and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks.
In the U.S., this material is intended for Institutional use only, not for public distribution.
In Canada, this material is intended for institutional investors only.
In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.
In the European Economic Area (EEA): This is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20-549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.
For qualified investors in Switzerland: This document is marketing material. Until 31 December 2021, this document shall be exclusively made available to, and directed at, qualified investors as defined in the Swiss Collective Investment Schemes Act of 23 June 2006 (“CISA”), as amended. From 1 January 2022, this document shall be exclusively made available to, and directed at, qualified investors as defined in Article 10 (3) of the CISA of 23 June 2006, as amended, at the exclusion of qualified investors with an opting-out pursuant to Art. 5 (1) of the Swiss Federal Act on Financial Services ("FinSA"). For information on art. 8 / 9 Financial Services Act (FinSA) and on your client segmentation under art. 4 FinSA, please see the following website: www.blackrock.com/finsa
For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the “Advice Law”), nor does it carry insurance thereunder.
In South Africa, please be advised that BlackRock Investment Management (UK) Limited is an authorized financial services provider with the South African Financial Services Board, FSP No. 43288.
In the DIFC this material can be distributed in and from the Dubai International Financial Centre (DIFC) by BlackRock Advisors (UK) Limited — Dubai Branch which is regulated by the Dubai Financial Services Authority (DFSA). This material is only directed at 'Professional Clients’ and no other person should rely upon the information contained within it. Blackrock Advisors (UK) Limited -Dubai Branch is a DIFC Foreign Recognised Company registered with the DIFC Registrar of Companies (DIFC Registered Number 546), with its office at Unit L15 - 01A, ICD Brookfield Place, Dubai International Financial Centre, PO Box 506661, Dubai, UAE, and is regulated by the DFSA to engage in the regulated activities of ‘Advising on Financial Products’ and ‘Arranging Deals in Investments’ in or from the DIFC, both of which are limited to units in a collective investment fund (DFSA Reference Number F000738).
Issued in the Kingdom of Saudi Arabia (KSA) by BlackRock Saudi Arabia (BSA), authorised and regulated by the Capital Market Authority (CMA), License No. 18-192-30. Registered under the laws of KSA. Registered office: 29th floor, Olaya Towers – Tower B, 3074 Prince Mohammed bin Abdulaziz St., Olaya District, Riyadh 12213 – 8022, KSA, Tel: +966 11 838 3600. The information contained within is intended strictly for Sophisticated Investors as defined in the CMA Implementing Regulations. Neither the CMA or any other authority or regulator located in KSA has approved this information. The information contained within, does not constitute and should not be construed as an offer of, invitation or proposal to make an offer for, recommendation to apply for or an opinion or guidance on a financial product, service and/or strategy. Any distribution, by whatever means, of the information within and related material to persons other than those referred to above is strictly prohibited.
In the United Arab Emirates this material is only intended for -natural Qualified Investor as defined by the Securities and Commodities Authority (SCA) Chairman Decision No. 3/R.M. of 2017 concerning Promoting and Introducing Regulations. Neither the DFSA or any other authority or regulator located in the GCC or MENA region has approved this information.
In Singapore, this is issued by BlackRock (Singapore) Limited (Co. registration no. 200010143N) for use only with institutional investors as defined in Section 4A of the Securities and Futures Act, Chapter 289 of Singapore. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.
In Hong Kong, this material is issued by BlackRock Asset Management North Asia Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong. This material is for distribution to "Professional Investors" (as defined in the Securities and Futures Ordinance (Cap.571 of the laws of Hong Kong) and any rules made under that ordinance.) and should not be relied upon by any other persons or redistributed to retail clients in Hong Kong.
In South Korea, this information is issued by BlackRock Investment (Korea) Limited. This material is for distribution to the Qualified Professional Investors (as defined in the Financial Investment Services and Capital Market Act and its sub-regulations) and for information or educational purposes only, and does not constitute investment advice or an offer or solicitation to purchase or sells in any securities or any investment strategies.
In Taiwan, independently operated by BlackRock Investment Management (Taiwan) Limited. Address: 28F., No. 100, Songren Rd., Xinyi Dist., Taipei City 110, Taiwan. Tel: (02)23261600.
In Japan, this is issued by BlackRock Japan. Co., Ltd. (Financial Instruments Business Operator: The Kanto Regional Financial Bureau. License No375, Association Memberships: Japan Investment Advisers Association, the Investment Trusts Association, Japan, Japan Securities Dealers Association, Type II Financial Instruments Firms Association.) For Professional Investors only (Professional Investor is defined in Financial Instruments and Exchange Act).
In Australia, issued by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975 AFSL 230 523 (BIMAL) for the exclusive use of the recipient, who warrants by receipt of this material that they are a wholesale client as defined under the Corporations Act 2001 (Cth). This material is intended for wholesale clients only and must not be relied or acted upon by retail clients. The material provides general information only and does not take into account your individual objectives, financial situation, needs or circumstances.
In China, this material may not be distributed to individuals resident in the People's Republic of China ("PRC", for such purposes, excluding Hong Kong, Macau and Taiwan) or entities registered in the PRC unless such parties have received all the required PRC government approvals to participate in any investment or receive any investment advisory or investment management services.
For Southeast Asia: This document is issued by BlackRock and is intended for the exclusive use of any recipient who warrants, by receipt of this material, that such recipient is an institutional investors or professional/sophisticated/qualified/accredited/expert investor as such term may apply under the relevant legislations in Southeast Asia (for such purposes, includes only Malaysia, the Philippines, Thailand, Brunei and Indonesia). BlackRock does not hold any regulatory licenses or registrations in Southeast Asia countries listed above, and is therefore not licensed to conduct any regulated business activity under the relevant laws and regulations as they apply to any entity intending to carry on business in Southeast Asia, nor does BlackRock purport to carry on, any regulated activity in any country in Southeast Asia. BlackRock funds, and/or services shall not be offered or sold to any person in any jurisdiction in which such an offer, solicitation, purchase, or sale would be deemed unlawful under the securities laws or any other relevant laws of such jurisdiction(s). The distribution of the information contained herein may be restricted by law and any person who accesses it is required to comply with any such restrictions.
For Other APAC Countries, this material is issued for Institutional Investors only (or professional/sophisticated/qualified investors, as such term may apply in local jurisdictions) and does not constitute investment advice or an offer or solicitation to purchase or sell in any securities, BlackRock funds or any investment strategy nor shall any securities be offered or sold to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction.
In Latin America, for institutional investors and financial intermediaries only (not for public distribution). This material is for educational purposes only it is your responsibility to inform yourself of and to observe, all applicable laws and regulations of your relevant jurisdiction
In Mexico, these materials are being shared in the understanding that the addressee is an Institutional or Qualified investor as defined under Mexican Securities (Ley del Mercado de Valores).
© 2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a trademark of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out our podcasts.