With economic growth continuing to disappoint six years into a recovery, the noted economist and president emeritus of Harvard University, Lawrence Summers, has suggested that advanced economies are likely trapped in a prolonged period of below-trend growth, a condition he calls secular stagnation.
Economists differentiate between patterns associated with a normal business cycle (cyclical) and those extending over several cycles (secular). The secular stagnation hypothesis rests on the premise of a global savings glut leading to the chronic absence of consumer demand.
With equity market valuations already stretched — and painful memories of recent asset bubbles ruling out much additional stretching — overall stock prices are only likely to track earnings for the foreseeable future. Absent the “kick” from price-earnings ratio expansion, a subdued pace of economic growth would almost certainly result in subpar returns for many U.S. stocks over the next several years. And if interest rates rose, as is virtually assured at some point, P/Es could even contract, offsetting a portion of whatever earnings growth occurred.
The importance to equity market returns of achieving at least trend-line growth of around 3% per year makes two recent articles by economists Robert Hall and Kenneth Rogoff especially timely. Their commentaries are posted on VOX, the policy portal of the Center for Economic Policy Research, or CEPR.
In his analysis, Hall shows that living standards in the U.S. have not risen for 15 years, thus confirming at least a stagnation in purchasing power. He provides several revelatory graphics regarding the domestic job market, which he tabs as the main source of the stagnation. On a hopeful note, Hall concludes that with slack in the labor market labor shrinking, domestic wage growth could be set to pick up.
Rogoff, an author and economics professor at Harvard, is less guarded than Hall and more optimistic than Summers. In his VOX paper, Rogoff notes that the tepid, U-shaped rebound from the Great Recession is consistent with historical patterns. As such, Rogoff maintains that the latent effects of what he calls a “debt supercycle” — and not necessarily a secular stagnation of demand — is restraining growth. In that scenario, domestic economic activity will revive when the deleveraging process concludes, which he projects to be relatively soon. Still, Rogoff does not dismiss the possibility that some long-term factors will continue to constrain demand, even as the debt supercycle reverses.
That economists as accomplished as Summers, Hall, and Rogoff would have different takes on the outlook for U.S. growth should reinforce the unpleasant reality that no one, regardless of pedigree, can see the future. Which might also explain how so many advanced economies got into this mess in the first place.