The major economic release last week was the second estimate of 2014’s fourth quarter and annual Gross Domestic Product (GDP). The GDP is “a measure of the value of the production of goods and services in the United States, adjusted for price changes.” The ‘first’ estimate that came out last month showed the economy growing 2.6% in the 4th quarter. This ‘second’ estimate (based on ‘more complete source data than was available for the ‘advanced’ estimate last month’ shows that growth was actually less—coming in at 2.4%.
I covered this report last week, while discussing why I believe that the current correction in longer-term bonds (i.e. 20+ Year Treasury Bond – TLT) is a countertrend move. But putting investment thoughts aside for now, I want to look more closely at the trajectory of U.S. economic growth.
To put the recent GDP number in perspective, all we have to do is recall that just a few months ago we were being told by the financial media that the economy was growing and that we were gaining traction. And although third quarter GDP did increase 5% compared to what it was in the same quarter in 2013, economic growth of 2.4% is not nearly as good. Sometimes we lose sight of the bigger picture when we focus on just one quarterly number. If we zoom out and look at what the actual economic growth has been going back to 2007, there is a disturbing trend that emerges.
Here is the annual GDP growth by year:
2007 1.8%
2008 -0.3%
2009 -2.8%
2010 2.5%
2011 1.6%
2012 2.3%
2013 2.2%
2014 2.4%
The average annual GDP growth of our economy over the last 8 years was only 1.2% per year. Granted, that takes into account the economic impact of the Crash of 2008 where GDP was negative in both 2008 and 2009. So let’s drop out those bad numbers and just look at the last 5 years when we saw the stock market recover. The average annual GDP over the last 5 years is still only 2.2%. That is far below the government target of 3 to 3.5%
According to Trading Economics:
The United States is the world’s largest economy. Yet, in the last two decades, like in the case of many other developed nations, its growth rates have been decreasing. In the 50’s and 60’s the average growth rate was above 4 percent, in the 70’s and 80’s dropped to around 3 percent. In the last ten years, the average rate has been below 2 percent and since the second quarter of 2000 has never reached the 5 percent level.
Our country’s GDP growth has been steadily declining since the 1950’s where the average growth rate was above 4%. We haven’t seen anything near 5% annual GDP growth since the beginning of this century – over 14 years ago. It is going be very difficult for a country like the United States to prosper and maintain our standard of living when the average annual GDP over the last 10 years has been BELOW 2% per year.
A macro trend like this doesn’t necessarily equate to specific trading ideas. However, the release of GDP data from quarter to quarter does have an influence on interest rates and the stock markets. For instance, we saw bond yields fall on the most recent release. Nowadays, though, it is all about the spin—and the narrative the Federal Reserve needs to maintain confidence. At some point, though, the lack of growth in our overall economy will have an impact on the value of stocks and bonds. Until then, I’ll continue to manage risk pursuing prudent profits in an effort to stay ahead of the curve.
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Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
