Boom Growth Continues
May. 6, 2019 Commentary

"Boom" Growth Continues


Recently the Bureau of Economic Analysis (BEA) announced their first quarter gross domestic product (GDP) growth rate. The BEA says our economy grew by 3.2 percent during the first quarter (real rate of change, annualized). The growth rate reported is higher than consensus was seeking. The annual economic growth rate the United States has experienced since the last recession has been close to 2 percent. The announcement of 3.2 percent growth is on the back of the 3 percent growth we experienced last year. Yes, the “boom” phase of the current expansion is upon us, and has been for more than a year.

So where is the economic growth slowdown we’ve been expecting? Have we been overly pessimistic on our economic outlook? To answer this question, let’s break down quarterly GDP releases by contributing factor.

Real GDP Growth Rate

The real, repeatable domestic private economy’s factors mentioned above (consumption, fixed investment) contributed 1.09 percent of growth during the first quarter and 2.61 percent in the fourth quarter last year. These factors contributed 1.49 percent of growth a year ago.

As it turns out, the big swing factors driving growth upwards in the first quarter, as compared to the fourth quarter last year, were inventory accumulation (difference of .52 percent), net exports (difference of 1.55 percent) and government spending (difference of .34 percent). A high level of inventory accumulation now tends to lead to lower levels of inventory accumulation in the future. We expect this factor to weaken over the next couple of quarters. 

The massive upward move in net exports, which contributed almost a third of the growth this past quarter was driven by weak import data, which can indicate a lack of final demand for imported goods here in the United States, rather than strong demand for our exports. We expect this volatile factor to soften as we move forward through this year.

We’ve been calling for GDP growth to retreat to about 2 percent this year, as compared to the 3 percent growth rate we saw last year. Two percent is still a good number, and, if reported, will give the Federal Reserve cover from raising interest rates later this year.

Labor Productivity – The Grail 

Economic growth rates of 2 or 3 percent is, for those of my age and older, an odd environment. Over the long term the U.S. economy grew by 3.2 percent per year, on average (1946 – 2007) when measured by either GDP or gross national product (GNP) growth. That growth was an average, which includes not just good times, but also recessions when GDP growth was contracting. Growth during the current expansion has been weaker than normal.

Why has this been the case? As far as the economic data is concerned, we can lay the weak expansion at the feet of low levels of labor productivity growth. GDP growth can be measured in various ways. One way is to look at growth in the labor force (number of people employed) and factor in growth in labor productivity (which actually is a residual number). This data shows productivity growth this expansion to be much weaker than has been the case historically – until just recently.

Labor productivity growth rose by an annual rate of 3.6 percent during the first quarter of this year, the fastest growth rate in more than four years. During an economic cycle, labor productivity growth tends to range between 1 and 2 percent. Not only is the quarter’s productivity growth rate strong by itself, the trend in productivity growth has been improving. Over the last year, productivity has improved by a 2.8 percent rate, the strongest annual growth rate we have seen in 10 years.

The sustainability of increased productivity it tied directly to investment spending (capital spending) within the economy, which allows workers to not just work more hours, but to work more efficiently because of capital deepening. If deepening continues, expect to see productivity growth rates to continue to be strong.

From a macro economic standpoint, there are significant reasons why labor productivity growth rates are important. Rising inflation rates tend to go hand-in-hand with rising economic growth. This is buttressed by rising wage growth rates tends to lead to higher inflation rates. All of this is true, unless economic growth is being fueled by rising labor productivity growth rather than rising employment trends. If, as is the case today, labor productivity growth is strong, the economy can grow without significant inflation pressure to occur. In other words, we have may have been experiencing the “grail” of strong GDP growth coupled with very low inflationary pressure.

In our current economic environment, we now have seen both strong productivity growth and a strong jobs market. The labor report for the month of April showed the unemployment rate fell to 3.6 percent, the lowest official unemployment rate we have seen since 1969 – almost 50 years!

Supply and Demand

From a longer-term perspective, if labor productivity continues its strong trends, inflation pressure should be lower and overall economic growth should both be higher than normal. In other words, the “grail” of strong growth and low inflation may be achieved. Without getting too wonky, what we may effectively be seeing is a shift in overall macro growth occurring. If this is actually happening, upward moves in interest rates by the Fed may indeed be put off to sometime in the future.

The economic growth over the last year or so has been driven by a surge in demand while a strong upward move in supply may now be occurring. If this is the case, the timing of the onset of the next recession may be extended.

So, where does this leave us? While the economy probably wasn’t as strong as the first quarter GDP report suggested, the improvement in labor productivity growth rates is certainly a positive development. Our long-standing expectation of 2 percent growth in economic activity this year currently stands. If we change that view (which historically we have been reticent to do) we may indeed raise our growth outlook.


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