Why Is Economic Growth So Slow?

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Includes: SPY
by: John M. Mason

Summary

The fourth quarter GDP numbers have been released and they show that the US economy grew at a 1.8 percent year-over-year rate of growth in the fourth quarter of 2015.

This rate of growth is not inconsistent with the expansion of the economy in the entire recovery period from the Great Recession.

Maybe this overall slow rate of growth is telling us something about the changes that are taking place in the economy and the world...and maybe we should pay attention!

The United States economy, year-over-year, grew by 1.8 percent in the fourth quarter of 2015.

The economy seems to be slowing.

The average fourth-quarter-over-fourth-quarter annual rate of growth in the six years of the recovery from the Great Recession is 2.1 percent.

The annual compound rate of growth of the real economy for the six and one half years since the third quarter of 2009, when the economy began to grow again, is 2.2 percent.

The United States economy is growing, but by historical standards, it is growing very mildly.

It seemed like a great deal of economic discussion this week and at Davos, Switzerland, last weekend centered around whether or not the United States and the world were entering into recessionary territory.

The talk in Davos considered, also, the slower growth rate in China and the perilous state of many countries included in the emerging nations classification.

But, no one seems to be able to pin point any huge bubbles or dislocations that might cause the recession to begin.

What is going on? Seems like this recovery…and possible future recession…has fooled a lot of people…and continues to do so.

Why is economic growth so slow?

It seems as if most economists have been wrong in predicting how the current recovery might progress.

From one side of the spectrum, some economists have continually been observing "green shoots" throughout the full recovery, seeming to believe that the US economy has always been just on the verge of accelerating economic expansion. This has led to a constant overestimating of the future growth of the economy.

On the other end, there are those economists that began predicting that the US economy would enter a period of hyperinflation because of all the monetary stimulus being applied by the Federal Reserve System and its quantitative easing. Double-digit inflation, they reflected, was not too far in our future.

The emphasis on a rebound of inflation within the United States and in the world still is very prevalent: "The World Has Been Wrong About Inflation."

The macroeconomic concepts and models built up before the Great Recession just do not seem to be appropriate to what we are observing now.

Maybe the world has changed and is continuing to change. Maybe the crucial focus of our governments should be on reform and restructuring and not on how we can stimulate the economies to put people back into the jobs they held before the Great Recession began.

It seems to me this reforming and restructuring are growing. There are several parts to this and I will deal with them in more detail in the future.

First, information technology is becoming, more and more, the foundation of business and government in the future. These changes must take place and yet, we really don't know what the outcome of these changes will be.

Second, the world is becoming more and more reliant upon services and not industrial production. It is remarkable how the US economy has changed in this over the past sixty years. The thing is that service industries do not seem to create as much labor productivity as did an economy based more on an industrial base. More and more research is backing this fact up.

Here you have the largest economy in the world, China, realizing in the past five years or so, that its economic modernization had to change and become more consumer-oriented, more service-orientated. This has made a substantial contribution to the slow down in China's economic growth.

Third, governments have to realize the massive role they play in helping their economies become more modern. Europe is a particular example of this as the Economic Union struggles with the inability of some countries to reform and restructure themselves. The EU faces the fact that it may not be able to achieve the unity it desires because some, like Italy, Portugal, Spain, and Greece cannot seem to get their act together. Mario Draghi, president of the European Central Bank, comments from time to time that the real success of the eurozone is going to depend upon whether or not all the nations can pull together to restructure themselves into the twenty-first century.

More and more companies are seeing the need to reform and restructure themselves. A large part of the historically high and growing M&A business is aimed at this end. This restructuring does produce economic growth in the short-run, improves efficiency and productivity for the longer-run.

Furthermore, other companies are taking it upon themselves to restructure. Latest pieces of evidence on this fact include AIG, American International Group, Inc. (NYSE: AIG) and Xerox Corporation (NYSE: XRX), both companies proposing to split up their operations. General Electric (NYSE: GE) has done a major job already in reorganizing and getting rid of parts of the company that don't seem to fit.

I believe that you will see more and more of this "slicing and dicing" of companies over the next five years, as corporations realize that they must become more focused, more responsive, and more manageable in order to compete in the global economy we are becoming.

All these factors and some more and keeping economic growth down in the world while changing it to become what it is to be. These things cannot be stopped. Governments can help to postpone the changes by trying to alter economic policies to preserve the economic structure of their past. Unfortunately, these aggregate demand policies will only hurt those that they are intending to help. Just as the credit inflation policies of the past sixty years have helped to create the economic inequality and resource dislocation that we see now in the world, a continuation of such policies will only exacerbate the situation.

Yes, the growth rates of the United States and the economies of other industrialized countries of the world are showing us that things are changing as corporations and governments adjust to the new economic era. What we must do is pay attention to the changes, try and anticipate further changes, and move with the modern world and not try and retain the worldviews of the past.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.