“For some time we have maintained that the economy, following the severe 2008 credit crisis, would grow at an exceeding slow and uneven pace, and this is the way it is playing out.
This is unlike the garden-variety post-war inventory recessions that were mostly short and shallow, and followed by robust rebounds that quickly exceeded prior peaks.
The crisis was caused by an extraordinary debt boom that will take many years to work off and create severe headwinds to economic growth.
Household debt as a percentage of GDP averaged 55% over the past 60 years, but soared to 99% by 2008. It has now declined to 87% and still has a long way to go before returning to anything near normal. Federal government debt has climbed from 56% of GDP in 2000 to 97% as of September 30th, and is undoubtedly higher now. In our view the overall debt is the single most important factor to take into account in analyzing the future growth of the economy.
The reduction in household debt since the 2008 peak has been the key factor in dampening economic growth to date. In fact, household debt has now been down for 13 consecutive quarters after never being down for even one quarter in the entire post-war period!
The effect of deleveraging is not a vague academic theory, but is clearly reflected in the real numbers. GDP in the fourth quarter was only 0.8% higher than it was at the peak four years earlier. In the last four quarters GDP growth was only 1.6%. While fourth quarter GDP growth was an annualized 3.0%, two-thirds of the amount was accounted for by inventories. These probably have to be pared down in the first quarter. By almost any measure the current recovery has been far weaker than any other post-war expansion….”
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