Most investors take a myopic view of economic growth. When viewed in isolation, second quarter real annualized GDP growth of 6.5% sounds outstanding. However, GDP growth per capita remains below trend (second graph below). For the economy to grow, there must be either productivity growth, growth in the labor force or both. See graphs showing both represent a drag on growth. Yet the largest obstacle remains debt which is growing much faster than the economy (last chart below).
Please proceed to The Details to understand the impediments to future GDP growth.
“We are living in an interminable succession of absurdities imposed by the myopic logic of short-term thinking.”
–Jacques Yves Cousteau
Unfortunately, influenced by the media, most investors take a myopic view of economic growth. When viewed in isolation, second quarter real annualized GDP growth of 6.5% sounds outstanding. However, when put in perspective it becomes apparent the outcome was the result of monstrous Federal sway and the reopening of a shuttered economy. Many tend to focus solely on the second-half jump in GDP shown on the graph below.
From a longer-term standpoint, GDP growth per capita remains below trend, as shown below.
For the economy to grow, there must be either productivity growth, growth in the labor force or both. The following chart illustrates multifactor productivity growth is falling. As stated by the Bureau of Economic Analysis (BEA), “Multifactor productivity (MFP), also known as total factor productivity (TFP), is a measure of economic performance that compares the amount of goods and services produced (output) to the amount of combined inputs used to produce those goods and services. Inputs can include labor, capital, energy, materials, and purchased services.”
And for the second element, the following graph shows the drop in labor force participation. The current reading remains far below pre-pandemic levels.
The shot(s) in the arm which caused the tremendous short-term boost to GDP growth included a combination of massive stimulus programs funded with additional Federal debt, and the Federal Reserve Bank’s (Fed) unprecedented monetary policy. This policy has included exponential growth in the Fed’s balance sheet as they purchase the new debt required to fund the stimulus. The monetary base and money supply (M2) have soared as shown below.
In addition to falling multifactor productivity and a low labor force participation rate, the real impediment to growth – which is getting worse every day – is the tremendous growth rate in debt. Unproductive debt merely pulls forward future consumption reducing future growth as the new debt must be serviced. The graph below illustrates how debt is growing incredibly faster than the economy. Until the debt problem is resolved, future economic growth will be lessened.
The S&P 500 Index closed at 4,395 down 0.37% for the week. The yield on the 10-year Treasury Note fell to 1.24%. Oil prices rose to $74 per barrel, and the national average price of gasoline according to AAA rose to $3.17 per gallon.
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