Why America's Economy Is Stuck In Low Growth

Includes: CREE, DE, DIA, MUB, SPY, TLT
by: Jason Tillberg

My greatest prejudice came when I was at a bar a few summers ago and saw a guy I thought looked like the legendary runner, Steve Prefontaine. I approached him and asked him if he knew who Steve Prefontaine was and he responded saying "yeah." He then showed me his T-Shirt that said "Cornell Track." This fellow was Bruce Hyde. Bruce Hyde holds the collegiate record for the mile running 3:55.76. So I asked him next, how many miles per week was he running before running that 3:55 mile. He responded 144!

Now that's reaching your peak and maxing out. It's near impossible to improve either that kind of level of training without getting injured or running a mile in 3:55, a truly amazing feat.

The U.S. has a strong GDP per capita per hour worked. It was $60.59 in 2011.

The U.S., relative to the rest of the world economies, sits at number 3 as of 2012 in terms of GDP per hour worked. Only Luxemburg and Norway have a higher GDP per hour work.

This is data from The Conference Board, a global research organization on GDP per hour worked.

So it's safe to say that the U.S. economy, in terms of GDP per hour worked, is in very good shape, sort of like Bruce Hyde was perhaps when he ran his 3:55 mile.

You grow an economy by increasing one or both of the variables, aggregate hours worked and/or output per each of those hours worked.

It is the output per each of those hours worked that is America's great challenge for economic growth in the years ahead. The trends in place are down and investments that need to be made to help increase productivity are also down.

The most telling chart of this challenge is in the "Real Disposable Income Per Capita."

Gains in productivity are akin to getting into better running shape. When you're not in shape, you may be able to run just 3 miles in 1 hour or 20 minutes per mile. When you get into great shape, you may be able to run 12 miles in 1 hour or 5 minutes per mile. Running more miles in 1 hour beyond 12 is unreasonable if not impossible, so there is a limit.

The real disposable personal income per capita rate of change since Bernanke took over as Chairman of the Fed in February of 2006, which is 7 years and 5 months ago, is an increase of just 3.44%. Using the same time frame, the rate of change for the previous years is as follows:

So we're looking at the lowest rate of change over a 7 year 5 month time period going back to 1966.

One reason for this is a slowing trend in productivity growth.

Here is a chart of the nonfarm business sector output per hour:

Now here is a chart of the 10-year rate of change in output per hour:

The rate of change recently peaked the second quarter of 2006 at 31.18% and has been falling since.

One of the big concerns I have for the future of productivity growth is the low levels of investment spending in the U.S. economy.

Here is a chart of Gross Capital Formation as a percent of GDP:

Without making investments in new tools and equipment, it's difficult to gain productivity growth. Had I not bought a John Deere (NYSE:DE) riding lawn mower that allows me to cut my grass in 1 hour Vs. taking 3 hours using a gas powered push mower, I would not be as efficient and productive per hour worked. Or had I not invested in some Cree (NASDAQ:CREE) LED light bulbs, that use a fraction of the energy of my non LED light bulbs, I would not have increased my productiveness of each kilowatt of energy I use.

These are 2 example of gross capital formation that I personally contributed to that helped to make my home economy more productive and efficient.

In the first 2 quarters of 2013, I noticed that real GDP is growing slower than aggregate number of hours worked.

Here is a semi-annual chart showing the year over year percent change of aggregate hours worked and real GDP:

The blue bars are total employees times average weekly hours worked in the private sector year over year percent change. The red bar is real GDP year over year percent change.

What this is implying is that we're working more hours and getting less real GDP growth. This is not economic progress but decline.

So what does this all mean for investors?

Going back to my lawn mower purchase I made 2 summers ago. It was a $1500 investment. In return, I got a reduction in the amount of time it took me to cut my grass. I assumed I would cut my lawn 16 times a year and each time, I would save 2 hours of my time. So in a year, I would save 32 hours I could then use to do something else with my time like write articles for example. If my mower lasts 10 years ( It should last 20!), my depreciation cost per year should be $150. As long as I can earn more money in the 32 hours I saved, which is $4.68 per hour, this would prove to be a good investment.

It was the gain in productivity that made this investment sound and prudent with little risk of say default.

Now the next investment for me would be to hire out the cutting of my grass. If it takes me 1 hour to cut the grass and I cut it 16 times a year, then I'm still using 16 hours of my time. Perhaps I'm productive enough and my time is worth enough that I can afford to pay someone $30 to cut my grass. That would be $480 a year. So long that I can make more than $480 in 16 hours, then this is a good investment.

So the first investment, which cost $150 a year, I saved 32 hours. This next investment would cost $480 a year and I only save 16 hours. So the return on my investment just went down and makes this investment more risky. But let's assume it's still sound and makes sense.

How can I get more productive now? I've already reduced the time I spend cutting my grass to zero. The fellow who cuts the grass is using the most efficient riding mower as well.

I'm out of ideas for making a new investment to increase my productivity for keeping my lawn nice and neat. However, I'm dependent on the cost of doing business. Taxes are up, gas prices are up and the cost of doing business is up. So now, the cost of cutting my grass may go from $30 to $35. The annual cost went from $480 to $560.

Unless my income goes up, my disposable income just went down $80 a year. My capacity to increase the aggregate amount of goods and services I consume just went down. It could be 2 nights out to dinner with my wife or a new painting to hang on the wall.

This analogy attempts to describe the U.S. economy today.

Real GDP growth as well as real return on capital is going to be very difficult to get on account of low rates or even negative rates of productivity growth.

At the same time, little productivity growth means the cost of doing business goes up and that should prove to be inflationary. Higher inflation will help bring interest rates up and higher interest rates will make getting a real return on capital that much harder.

This forecast would be bad for bond funds as rising interest rates would hurt bond funds.

However, this may benefit stocks on account of capital flows flowing out of bonds (NYSEARCA:TLT) (NYSEARCA:MUB) and into stocks (NYSEARCA:SPY) (NYSEARCA:DIA).

I think investors can also put a focus on increasing the efficiency and productiveness of the home economy and look to invest in durable goods that make them more productive and efficient. Invest in that John Deere riding lawn mower if you can save time and make it worth it or invest in Cree's LED light bulbs to reduce your energy consumption and lower your electric bills for example.

Disclosure: I 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.

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