Lost Decade? Hardly

From James Pethokoukis: Lost Decade? The US is about to have its first 10-year period since World War II without at least one year of 3% growth.

Mr. Pethokoukis, in his earlier articles, is right in his criticism of regulation and raising the minimum wage, but he is wrong to suggest we’re in a ‘lost decade’.

GDP growth is just one measure of economic vitality; other factors include technological innovation, asset appreciation, and intellectual discovery.

Look at the huge gain in stock prices since 2009; the accent of web 2.0 valuations, as well as the booming Silicon Valley tech scene; surging Bay Area (and other high-end) real estate markets; on-demand entertainment from Netflix; on-demand transportation from Uber; on-demand shopping and cloud computing from Amazon; The Large Hadron Collider and the discovery of the Higgs Boson; the proliferation of smart phones and mobile advertising; iPhone, Facebook, Tesla, the second biotechnology revolution, and private space programs – hardly a lost decade by any stretch of the imagination.

But admittedly, if you have a lot of student loan debt and or a sub-par IQ and can’t find a good-paying job, you may feel left out, not fully participating, like the train to prosperity left the station without you. So I can understand the skepticism that inevitably arises when someone tries to paint a rosier picture of the economy.

The S&P 500, as of August 2015, is at 2,100. A decade ago, 2005, it was at 1,200 – a gain of 75%, and that does not include the generous dividends. Excluding dividends, that works out to a compounded gain of around 5.5%, which is within the historical average.

Yes, lax monetary policy is a contributing factor for rising stock prices, but fundamentals are playing a bigger role. For example, the S&P 500 PE ratio is flat as stock prices surge, which is possible because EPS is rapidly growing:

In the late 90’s you had flat earnings and rising prices, an unsustainable combination that resulted in a very high PE ratio.

Cash balances keep growing and are at record highs:

Other data such as exports and consumer spending keep making news highs, too.

Yeah, 1-3% GDP growth may be sluggish compared to the feverish growth of the 40’s and 50’s, but compared to the rest of the world and adjusted for inflation, U.S. GDP growth is actually pretty good. And this is especially amazing for an economy as large as America. As intuition would suggest, it’s easier to double the size of a small economy than a large one.

As shown below, U.S. real GDP growth exceeds that of Australia, Japan, Europe, and South America.

The reason for this is when you look at real GDP instead of nominal GDP, America comes out way ahead. Most of these emerging markets have high nominal GDP growth, but also really high inflation and falling currencies, neither of which America has. So when Bay Area real estate goes up 20% a year, that is a real gain. But when a property rises 20% in a country with high inflation – Brazil, for example – when the gains in the local currency are converted to US dollars, there is no gain and possibly even a loss.

He concludes the article by imploring for a ‘Great Optimization’, which I agree we do need better policies to not squander America’s financial and cognitive capital, a topic I have discussed numerous times here, including various proposals.


Why America is Not in Decline (long post)
A Case Against Secular Stagnation