Aug 31, 2016 | Post by: Roman Chuyan, CFA Comments Off on Why The Economy Is Slowing

Why The Economy Is Slowing

The U.S. economy is clearly slowing down – real growth was only 1.1% (annual rate) in the second quarter of 2016. Real (net of inflation) growth in gross domestic product is the broadest measure of the health of our economy, and is the main driver of income and employment growth.

Why is the economy slowing? A slowdown in key metric – labor productivity – has been subject to discussions among economists, including the Federal Reserve. In fact, Fed Vice Chairman Stanley Fischer talked about the issue of slow productivity growth in yesterday’s interview. Labor productivity, defined as output per employee, is one of two major components of real GDP growth (the other component is population growth).

Labor productivity - GDP - tactical investment management

On this graph, I plotted real year-over-year growth for both GDP (the red line) and productivity (the blue line, available only thru 2014) – for example, 2% means it grew by 2% from the same quarter a year ago. You can see that GDP growth  is highly correlated with growth in productivity . It is also significant that productivity often leads GDP.

Productivity growth has tracked at a much lower level in recent years than it’s long-term average. Average productivity growth has been 0.84% in the past four years (after 2010, to exclude recession effects), compared to long-term average of 1.8%.  This is what concerns economists and Fed officials: slow productivity growth may jeopardize U.S. economic growth, employment, and the Fed’s plans of normalizing monetary policy.

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