End of the New Normal GDP

Perpetually slow growth has been the ethos of this 8 year recovery cycle. The New Normal mantra coined by PIMCO in 2009 has become ubiquitous in financial circles to distinguish this sluggish expansion cycle from all others. Our lethargic global recovery was a fait accompli for the sins of state sponsored mismanagement during the preceding decades. With all 1st world countries shifting from workaholic boomers to retiring leisure seekers, can the US reverse the receding tide of economic growth and productivity rates?

The US hit its post WWII stride as the baby boomers flooded the workforce reaching their peak earning and spending years in the 1980’s and 90’s.  We became so used to the consistent 4%+ years of GDP growth that consensus has pegged the current cycle as anemic, quickly blaming Bush and Obama for the failure to achieve a “normal” recovery. The aging demographic of boomers has been a major component of shrinking interest rates and slowing economic growth over the past couple of decades. After almost 8 years of just 2.1% economic growth rates, the last 2 quarters of 3%+ growth raises the question of just what potential the US and Western World have of achieving the “old normal” growth rates.

Unfilled Job Openings are hitting record levels as both low and high skilled labor demand remains difficult to satisfy as the prime age labor force growth slows from over 1% to almost zero and unemployment nears record lows. While job openings have increased the past 2 years, hiring trends have been stagnant since late 2015. Our personal experience failing to find even unskilled machine operators in a time of renewed growth is anecdotal evidence of national trends. Handling new orders and converting heavy backlogs to timely shipments is vital to profitability and an alarming challenge for the goods producing sector.

Who’s left to fill the jobs? Even when the the labor markets were considered tighter in terms of unemployment in 2000 and 2007, we had more workers per job opening compared to today.

Trade skill professions are particularly troubled enticing labor back to the residential construction industry with over two thirds unable to fulfill their needs.

Until now, every decade since the Great Depression had seen a steady surge to new highs in construction workers. Home building, high tech data centers  and huge deferred maintenance of roads and bridges are in growing desperation for new labor. To exceed the old peak in 20067 would require at least a few more years at the current pace.

With so few unemployed bodies remaining to satisfy the growing supply of job openings, the normal laws of supply and demand should dictate above normal wage inflation to ration short supply. Employment costs should be above the peak rates of the past 2 decades, yet they have confounded every economist for years, including our esteemed Federal Reserve Chair Janet Yellen. “I may have misjudged the strength of the labor market…& the downward pressures on inflation that may prove to be unexpectedly persistent” said Yellen (9/25/17). 

While we feel wage inflation will move back to the 3 to 4% zone as GDP gets closer to sustaining 3% growth, we are not worried about inflation or interest rates. Our ironic thesis is that the tight labor supply and demographics are limiting employment income growth for lack of skilled candidates. The “A” players have been hired. The majority outside the workforce today are either near retirement age or unskilled millennials. The elderly have moved beyond peak earnings and more likely to take a pay cut. The unskilled can’t fill the higher paying skilled positions and more likely to accept low wage service jobs in leisure and hospitality. This rare phenomenon doesn’t prevent economic growth or inflation, it just keeps the growth rates below their 4 to 5% potential.

Retiring boomers and slower demographic consumption trends have left the US with excess labor capacity and factory space with resulting anemic productivity. While today’s report showed improved productivity numbers, the historic comparisons are still weak and Manufacturing productivity turned negative last month. 

This article has painted a bleak picture of the post 2009 Great Recession recovery trends, but we have steadfastly maintained a positive economic and stock market outlook for over 8 years now. There are some propitious winds blowing in this new global economic expansion cycle that began in 2016 that boost our moribund growth rate. Construction trade school growth, technology absorption, tax incentives and quality immigration are movements by the private and Government sectors that will modestly stimulate our labor impaired economy. Global synchronicity is also lifting all boats after a prolonged period of suppressed demand and capital spending. The explosion of Cloud based software and transactions in a brave new world led by Amazon, Alibaba, Netflix, Google, Paypal and Apple offer hope that efficiencies will be absorbed even in our most basic old world industries. Labor shortages are endemic to our aging workforce and will limit sustained growth above 3%, however the confluence of market forces and unified global trends should accelerate growth beyond the 2% consensus. Stocks may hit the pause button in early 2018, but we expect economic growth to continue to exceed expectations.




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