The Stock Market Is Booming—But Our GDP Is Fading

by Feb 26, 2018Market Insights, Market News, Uncategorized

Gross domestic product (GDP) is the market value of all goods and services produced in a period of time (quarterly or yearly).  GDP is commonly used to determine the economic performance of a whole country, and make comparisons between countries. Why would you care about our GDP? Well, if you are invested in the stock market, directly or through your retirement savings accounts, our GDP trend has an important significance for the value of your stocks and your life savings over the long haul. In this article, we will show that our GDP is deteriorating. In the next article we will discuss how this alarming GDP downward trend will impact the price of US stocks for many years to come.

We all know that our economy cycles between recession, in which our GDP goes down and growth in which our GDP goes up (as seen in the graph below that plots GDP from the early 50s until today), but if we look at the long-term GDP trend, we notice that It’s been trending lower for most of the past three decades.

Data Courtesy: St. Louis Federal Reserve

There are three main factors that are responsible for the fading GDP growth:

  1. As we discussed in [DEBT ARTICLE], economic growth has been outpaced by the rise in federal, corporate, and individual debt. As a consequence, both the public and the private sectors are finding it difficult to obtain further loans to continue spending, and are suffering under interest payments that make further spending difficult. Interest rates are still being kept at historic lows to remedy the debt burden, but the Federal Reserve may have to stop forcing such policies: They may have bought more time, but their actions have just encouraged more debt.
  2. Demographics. Baby boomers can take a lot of credit for the economic growth, but they are progressing towards retirement, so their spending will decrease, and many of them will need Social Security and other entitlements, which adds to the taxpayer burden. At the same time, we are witnessing slow population growth and tougher restrictions on incoming legal immigration, which reduces the workforce and consumption, impacting economic growth.
  3. The key to economic growth is increased productivity. However, we have been witnessing years of poor decision-making in terms of economic, fiscal, and monetary policies. Instead of incentivizing long-term investments, policy makers have focused on increased consumption. As a result, the productivity growth rate has been dwindling.

Economic growth will continue to weaken

There are other reasons behind the declining GDP trend, but the three mentioned above are the primary causes of the weakened secular economic growth that is bound to continue in the coming years.

If you believe the economic growth will beat the trend of the past 30 years, just think of this: A 10-year growth rate of 8.21% is necessary to push the adjusted valuation to its long-term mean. This rate is almost 2% higher than the average of the past 70 years, and we haven’t witness such growth rates since 1997.

To learn how a declining GDP places investors in the stock market at a higher risk than they imagine, see this article which is part 2 of this series.