Can the US could break out of the ‘new normal’ patterns of sluggish acyclical growth seen since 2010? Part I showed that improving trends in return on capital and real labour productivity generate a background in which we should expect rising capital investment and rising employment. At the least, this suggests an uptick in GDP growth in the short and medium term. In addition, it looked at two potential subcyclicals that could accelerate that growth into a genuine business cycle upswing - ie, a breakout from the ‘new normal’. The dynamics for both the capital goods sector and for inventory management - both of which can act as business cycle accelerators - have been in a ‘negative adjustment’ phase over the last two years , but this has left them, ironically, increasingly sensitive to the current rise in global producer prices.
But if all these provide fuel for a potential business cycle upswing, could these nevertheless be snuffed out by a deterioration in saving/consumption decisions in the household sector and, more generally, a tightening of credit and monetary conditions?
This piece makes three points:
- The current tightening in monetary conditions are not dramatic, and pose no material threat to GDP growth in 2017/18.
- Bond yields have already risen further than is easily explained either by current supply/demand conditions in bond markets, or by what consensus expects of Fed rate rises, and the prospects for inflation and GDP over the coming five quarters. In the absence of a monetary policy ‘mistake’ bond markets alone are not about to snuff out a significant acceleration in economic growth.
- Nevertheless, household savings rates fell gently but persistently throughout 2016 and are now at historically low levels. A reversion to the mean would cut approximately 30bps off GDP growth. In a ‘new normal’ scenario, in which GDP averages 2.1% with a standard deviation of 70bps, this is a material risk.