Flash Point: Twenty More Years (If We’re Lucky)

We have argued two themes in recent months:

  1. Low economic growth is structural and will persist for 20 years or more. See Signs of a Structural Change in the US Economy, The Hole in Jackson Hole.
  2. High unemployment is structural and here to stay. See The Hole in Jackson Hole, What’s the Future for Jobs?

Two new eletters contribute significantly to both points.

Zero Economic Growth Forever?

In his third quarter letter, On the Road to Zero Growth” and “Help, Help, I’m Being Repressed!, Jeremy Grantham of GMO writes:

  1. The U.S. GDP growth rate that we have become accustomed to for over a hundred years – in excess of 3% a year – is not just hiding behind temporary setbacks. It is gone forever.
  2. Going forward, GDP growth (conventionally measured) for the U.S. is likely to be about only 1.4% a year, and adjusted growth about 0.9%.
  3. Population growth that peaked in the U.S. at over 1.5% a year in the 1970s will bob along at less than half a percent. This is pretty much baked into the demographic pie. After adjusting for fewer hours worked per person, man-hours worked annually are likely to be growing at only 0.2% a year.
  4. Productivity in manufacturing has been high and is expected to stay high, but manufacturing is now only 9% of the U.S. economy, down from 24% in 1900 and 15% in 1990. It is on its way to only 5% by 2040 or so. There is a limit as to how much this small segment can add to total productivity.
  5. Growth in service productivity in contrast is low and declining. Total productivity is calculated to be just 1.3% through 2030, if we use current accounting methods.
  6. However, current accounting cannot accurately handle rising resource costs. Spending $150-$200 a barrel in offshore Brazil in the future to deliver the same barrel of oil that cost the Saudis $10 will result perversely in a huge increase in (Brazilian) GDP. In reality, rising resource costs should be counted as a squeeze on the balance of the economy, as they lower our total utility. [We disagree with Grantham on two points. The EIA has said that by 2020, the US will be an oil exporter and not an importer of Brazilian oil. Also, the Saudi’s marginal cost of production is several multiple higher than $10. See point 10 below.]
  7. Measuring the non-resource balance of the economy produces the correct effect. The share of resource costs rose by an astonishing 4% of total GDP between 2002 and today. It thus reduced the growth of the non-resource part of GDP by fully 0.4% a year.
  8. Resource costs have been rising, conservatively, at 7% a year since 2000. If this is maintained in a world growing at under 4% and a developed world at under 1.5% it is easy to see how the squeeze will intensify.
  9. The price rise might even accelerate as cheap resources diminish. If resources increase their costs at 9% a year, the U.S. will reach a point where all of the growth generated by the economy is used up in simply obtaining enough resources to run the system. It would take just 11 years before the economic system would be in reverse! If, on the other hand, our resource productivity increases, or demand slows, cost increases may decelerate to 5% a year, giving us 31 years to get our act together. Of course, with extraordinary, innovative breakthroughs we might do even better, but we certainly shouldn’t count on that. (Bear in mind that we don’t even know precisely why the prices started to rise so sharply in 2000.) Excessive optimism and doing little could be extremely dangerous
  10. For a few years fracking will add helpfully to growth: my guess is that the benefit will peak at about 0.5% within five years, but be modest over longer periods. The key concept here for understanding growth is to know when the maximum upward push will occur. (See Appendix A.)
  11. Increasing climate damage, reflected mainly in food prices and fl ood damage, is going to increase. With any luck this will not be severe before 2030 (we allow for a 0.1% setback) but it is very likely to accelerate between 2030 and 2050. A great deal will depend on our responses.
  12. The bottom line for U.S. real growth, according to our forecast, is 0.9% a year through 2030, decreasing to 0.4% from 2030 to 2050 (see table on Page 16). This is all done presuming no unexpected disasters, but also no heroics, just normal “muddling through.”

We have reproduced the majority of Grantham’s summarized points from his discussion and by way of comment note that his view of economic growth is consistent with what we see ahead.

No More Jobs

At the same time we received John Mauldin’s latest Thoughts From the Front Line: Where Will the Jobs Come From? He gives an excellent in-depth look at employment issues in the US. Perhaps the US. The state of manufacturing jobs is perhaps the most startling part of his analysis – see Figure 1. Using data from FRED®, we reproduce the total job numbers for manufacturing in the US as shown by Mauldin (click on charts to open in a new window).

Figure 1. Employment in manufacturing (MANEMP).

The number of manufacturing jobs is the lowest since World War II. In figure 2 we create a more meaningful representation of the data as the percentage of the population employed in manufacturing.

Figure 2. Percentage of the population involved in manufacturing (blue line); industrial production (INDPRO: inverted – red line).

The Industrial Production Index has shown a modest exponential growth since 1919. We show it in Figure 2, inverted. There has been a steady decline in employment in manufacturing that inversely correlates well with the increase in the industrial production index, a measure of productivity.

The increase in productivity due to technical innovation and automation is removing manufacturing jobs. The growth of the service sector is in low quality service jobs as we have discussed in the past. The massive unemployment or underemployment among college graduates indicates the growth is not in the higher quality and professional service jobs. Also, refer to points 4 and 5 above of Grantham’s.

If, as we have argued, economic growth is already at its post-recession highs, the jobs will not be there leaving the question of what do we do with a large unemployed and unemployable populace?

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