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Home Stocks

The Stock Market’s Rising Risk: Mediocre GDP Growth Ahead

by admin
March 31, 2021
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Photo of weathered highway

Old road epitomizes GDP mediocre growth ahead

getty

Stock market gains ride the back of economic growth. Without a robust economy, it’s difficult to drive company stocks meaningfully higher.

While stock investors may cite high GDP recovery rates, it’s the longer-term projections of real GDP growth that are key – and they are uninspiring. From the 6.5% recovery rate in 2021, growth is expected to taper off to 3.3% in 2022, 2.2% in 2023 and 2.3% beyond. Those last two numbers represent a fully recovered economy once again operating at a subpar level.

Why is 2.3% considered mediocre?

To answer that question, we need to examine past GDP growth in three steps.

First, make the data “real”

“Real” means extracting inflation (AKA, the dollar’s loss of purchasing power). The dotted line in this graph shows each period’s dollar value in 4th quarter 2020 dollars. For example, the 1950-Q1 dollar is equivalent to $8.90 2020-Q1 dollars. Thus, the 1950-Q1 GDP of $70 B is $625 B in 2020-Q1 dollars.

Graph shows significant inflation adjustment over the 70 years

Quarterly GDP numbers – as reported and adjusted for inflation “real” (1950-2020)

John Tobey (FRB of St Louis – FRED)

Second, plot the data using a logarithmic scale

A logarithmic scale climbs at an exponential rate. Therefore, it allows seeing growth rates as sloping straight lines. In the 60 years before the Great Recession, the annual growth rates between recessions were comparable at about 3.5%.  However, the post-Great Recession 2010-2019 decade produced an annual real GDP growth rate of only 2.3%. (Hence, economists’ long-term projections, mentioned above, that show a continuation of this subpar growth.)

Previous 3.5% real growth rates contrast with pre-Covid-19 decade's significantly lower 2.3%

Quarterly real GDP plotted with logarithmic scale shows pre-Covid-19 decade’s lower growth rate … [+] (1950-2020)

John Tobey (FRB of St Louis – FRED)

Third, separate out the population growth effect

Population growth necessarily pushes total GDP higher. To see the growth over and above that increase, “per capita” GDP can be examined. Over the post-Great Recession decade, population growth was 0.7% growth, leaving 1.6% as the GDP per capita growth.

Graph shows real GDP per capita growth rate of 1.6%

Pre-Covid-19 decade 2.3% real GDP growth rate contains 0.7% population growth rate

John Tobey (FRB of St Louis – FRED)

The bottom line: Dismiss the quarterly recovery GPD growth rates and worry about the subpar annual projections

GDP recoveries mean recapturing a recession’s lost ground, and they can be deceptively large. Therefore, their growth rates should not be projected into the quarters and years ahead.

So, ignore articles that hype recovery growth rates, like the CNBC write-up: “10% GDP growth? The U.S. economy is on fire, and is about to get stoked even more.” That 10% number is misleading. It’s the first quarter 2021 projected recovery rate of 2.4% that has been annualized to look huge (the entire year is projected at 6.5%). (The article did the same thing with the fourth quarter 2020 growth rate – turning 1+% into 4.1%.)



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Tags: AheadEconomyGDPgross domestic productGrowthMarketsMediocrerisingRiskstockStock Market
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