In a record 11th year of the economic expansion, U.S. economic growth has slowed to a roughly 2% pace, as positive effects from tax cuts have largely faded and trade tensions foment an environment of uncertainty that threatens economic activity. Although these short-term dynamics impact the pace of growth of the current economic expansion, ultimately, for long-term investors, long-term growth matters most. Given current and projected productivity and labor supply dynamics, productivity is unlikely to provide a significant lift to future growth, while constrained labor supply is likely to be the limiting reagent to growth in the absence of policy change.
When we think about short-term growth, we consider a variety of factors that impact demand. However, when we think about long-term growth, it’s all about supply and, in particular, productivity and labor (EXHIBIT 1). Essentially, economic growth is a function of the growth in workers plus the growth in output per worker.
EXHIBIT 1: Long-term growth is all about supply
Real GDP growth, average year-over-year % change
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, J.P. Morgan Asset Management. GDP drivers are calculated as the average annualized growth in the 10 years ending in the fourth quarter of the last year of each decade. Data are as of November 20, 2019.
The output per worker can be improved by giving workers better tools and more of them. While there have been significant technological advances in the last 20 years and the “tools” have gotten much better, not all of these advances have made the workplace more efficient, amounting instead to a benefit to the consumer rather than the worker, and at competitive prices. Additionally, while investment spending as a share of GDP has oscillated with the business cycle, at the same time, the depreciation of capital stock has risen steadily over the same period, as the technological innovations of the 1980s and 1990s have gradually become obsolete (EXHIBIT 2). Therefore, the value of the capital stock, which includes equipment, software, machinery, structures and intellectual property, has grown more slowly at an average pace of 2.2% in the last 20 years vs. 3.1% over the last nearly 70 years, and will likely continue to do so. This has contributed to lackluster productivity growth in recent years. Therefore, we do not expect productivity to be the driving force of growth going forward.
EXHIBIT 2: As capital spending rises, so does the depreciation of capital stock
Non-residential fixed investment and depreciation as share of nominal GDP, annual, % of GDP
Source: Bureau of Economic Analysis, J.P. Morgan Asset Management. Data are as of November 20, 2019.