Steady As She Goes–Three Yards and a Cloud of Dust Playing Out
Read time: 7 minutes
As we look forward towards the fourth quarter of this year, it’s time to start considering what factors may weigh on our basic, core economic outlook for 2026. Our theme this year has been “Three Yards and a Cloud of Dust,” a theme meant to conjure up slow, steady growth in your mind’s eye. We’ve been calling for GDP growth in the U.S. of 1.5% to 2.0% this year.
The updated data from the Bureau of Labor Statistics (BLS) for the first and second quarter—combined with the Atlanta, New York and Dallas Fed’s modeled expected GDP growth for the third quarter—shows U.S. GDP growth this year coming in at 1.8% on an annualized basis. This figure is in the center of our long-standing growth forecast for 2025.
In addition to our GDP slow-growth expectation, our “Three Yards” theme is calling for inflation to remain reasonably well-behaved with our target core Personal Consumption Expenditures (PCE) target rate of 3.0%. As of August, the PCE core rate was +2.9% on a year-over-year basis.1 So again, our “Three Yards” theme has been playing out as expected.
Major Factors Adding to Slow, Steady Growth
We live in a world where change is seemingly the only constant. Technological changes are all around us with the rapid build-out of AI capabilities. Political change is present—some welcome it, others resist it, but change is happening.
Global allegiances seem to be shifting as India’s premier strolled with President Xi of China, Premier Putin of Russia and Kim Jong Un of North Korea. And this from a national leader whose country’s laws are rooted in British common-law traditions. Strange times, indeed—like Alice in Wonderland, down the rabbit hole.
But from an economic standpoint, change in global and U.S. real GDP growth rates have remained in a narrow corridor for some time. The folks at the International Monetary Fund (IMF) agree with this observation. Want some data regarding historical U.S “real” GDP growth rates?
| Average Real GDP Growth in the US from 1970 through 2023 | |||
|---|---|---|---|
| 1970-2023* | 1970-2009 | 2010-2023* | |
| Average GDP Growth | 2.8% | 2.9% | 2.5% |
| Standard Deviation | 1.9% | 2.2% | 0.4% |
| *Excludes data from 2020-2021 | |||
Data sourced from the Bureau of Economic Analysis
Over the last two decades we have been living in an exceptional period: Not of growth, but the persistence, and stability of growth. Since the end of the financial panic in 2008-2009, U.S. economic growth stability has been a marvel which most don’t recognize or understand. Yet the markets—particularly the stock market—appear to “get it”.
The volatility in economic growth has collapsed by 80% over the 14 years ending in 2023 as compared to the 40 years prior to that period (see data above). And yes, I think it appropriate to exclude the “manufactured” economic collapse and boomerang rebound of 2020 to 2021 (the COVID years) in this analysis. That collapse had nothing to do with supply/demand, market-driven economic volatility.
Cause and Effect
So, what has happened that has led to this long period of reasonably low economic growth volatility? I was recently reading an article in Barron’s magazine that addressed this issue, written by Bannockburn Global Forex’s Chief Market Strategist Marc Chandler.
Chandler believes the moderation in GDP growth volatility has been driven by two major factors. He cites the buildup of persistent “surplus” capital on a global scale and demographics as the two main over-riding factors that have led to the significant decline in economic growth volatility. Let’s take a peek at these two major, macro factors.
Surplus Capital
Surplus capital can be defined as global savings—saved capital over and above the economy’s “need” for the capital on an operational basis. Included in the accounting of surplus capital are corporate cash piles, sovereign wealth fund balances and arguably money market fund balances; all of these have grown to a point that there may now be more capital than productive outlets for it.
An abundant level of capital pushes down its own price (more supply than demand). This “oversupply” of capital is reflected in “real” interest rates. According to The Economist magazine, “real” 10-year government debt interest rates are now +1.1% in the U.S., +1.7% in China, -1.6% in Japan, +0.8% in Britain and +0.7% in the EU, for an average of +0.5% on a developed-world average basis.
Over the longer-term, the U.S. “real” rate on the 10-year Treasury has averaged +1.7%.2 So “real” interest rates are broadly lower than what’s been the case over the longer term. Some suggest this is due to the abundant level of surplus capital.
Interestingly, according to a report from the New York Fed, there’s a significant possibility that U.S. short-term rates may eventually return to a near 0% “real” level, from today’s +1.0% range. The Fed reduced the Funds rate this past week by .25%, to 4.0% to 4.25%. If the New York Fed report is accurate, we may see the Funds rate decline by another 100 bps if core inflation stays in the 3.0% range.
How much money are we talking about when we say “surplus” capital? According to the Sovereign Wealth Fund Institute (SWFI), the world’s top 100 sovereign wealth funds control assets of $15 trillion. As of mid-2024, corporate cash on hand totals $4 trillion.3 One could argue that money market funds represent another form of surplus capital (perhaps on a shorter-term basis) and are currently $7.5 trillion.4
Taken together, noted “surplus” capital is in the $27 trillion range, while total global GDP is around $110 trillion. So, the noted “surplus” capital level is around 25% of global total GDP.
This is serious capital; no wonder global interest rates are so low. I see little on the horizon that will alter this liquidity factor dramatically.
Demographics
A lack of births on a global scale limits present and future labor force growth rates and keeps a lid on consumer final demand growth rates.
According to the UN and the Pew Research Center, the world’s population grew by 3.0% per year from 1950 to 2025. These organizations project that global human population will grow by an average of 0.3% per year over the next 75 years. And what of the short term? Between 2025 and 2030 global population is projected to grow by 1.5% per year, half the level we have seen on average over the last 75 years.
So, the growth in population-driven final demand has slowed to about half the “normalized” rate we have seen over the last three-quarters of a century. That demand growth rate should continue to contract. This all leads to lower demand growth rates for “usable” capital, in an environment of strong “surplus” capital availability.
Labor Productivity a Key
Before we leave the growth story, we need to understand how important labor productivity growth rates will be going forward.
With slowing growth rates occurring in population levels, strong labor productivity growth will be necessary for the world to experience growth rates like what we have witnessed in the past. Many are counting on the artificial intelligence buildout to provide the tools necessary for the world’s economic growth to continue to expand.
But the topic at hand is the slow growth rate and surplus capital that are part of the world’s current economic structure. It’s important for me to point out that I don’t expect the world’s (and the U.S.) economies to grow in an upward straight line.
Shocks and missteps will take place, which will throw the economy into a cocked hat. Humans make mistakes; errors in judgment and reactions are seldom perfect. We WILL see periods when the economy is struggling at times in the future. I don’t suggest the capitalist business cycle has gone away. It is alive and well.
But as we come into a new year, with the variables outlined today, keeping a moderate view towards growth (and inflation) continues to be appropriate.
Sources:
1Bureau of Economic Analysis (BEA) https://www.bea.gov/data/personal-consumption-expenditures-price-index-excluding-food-and-energy
2FactSet
3Bloomberg https://www.bloomberg.com/news/articles/2024-06-13/cash-holdings-by-us-corporates-surge-to-4-11-trillion-in-the-first-quarter
4Board of Governors of the Federal Reserve System via FRED https://fred.stlouisfed.org/series/MMMFFAQ027S
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