From On My Radar (September 29, 2017):
The global economy continues to improve. Recession probability for the U.S. remains minimal in the next six to nine months. Europe’s economy is on better footing. Risks persist, including North Korea, a sharp slowdown in China, fiscal dysfunction in the U.S. (e.g., tax cuts, fiscal spend), and growing protectionist risks to global trade. Debt remains a significant headwind to growth as can be seen in this next chart.
Total Credit Market Debt-to-GDP
Here’s how to read the chart:
- The chart looks at a number of growth factors.
- For example, nominal GDP (before inflation is factored in) is lowest when Total Credit Market is above 318% Total Debt-to-GDP.
- The blue line tracks the Total Debt-to-GDP ratio over time.
- Note the upper dotted “high debt” line at 318%.
- The yellow highlights show the growth when in the high debt zone.
- Note how much better growth is when in the low debt zone. Also note that Total Debt-to-GDP peaked in late 2009 but remains high.
Also note the very last data box “Non-Financial Productivity.” Overall GDP growth comes from the total number of workers multiplied by their collective productivity. More workers producing more equals greater growth. With aging demographics (typically people moving into their lower spending years… they have a lot of stuff and kids out of the house) and fewer workers… you can see the pressure it can put on growth. And then with debt to be repaid, how much extra money is there to spend on things. Growth suffers.
Two Ds: Debt and Demographics are headwinds to growth. It is going to be hard for corporations to grow earnings much faster than GDP. Some will, of course, but in the aggregate, it’s a headwind and we are seeing it consistently in the low growth GDP stats. What we really need is Dedication, Determination, and Discipline. Let’s tell that to our representatives in Washington.READ MORE