Tuesday, November 18, 2014

If You Think Real GDP per Capita Growth Sucks Now...

...then just wait until the unemployment rate is no longer falling. I've claimed this in the past and this post provides the evidence.

The following scatter chart compares the annual change in quarterly real GDP per capita (left scale) to the annual change in the quarterly unemployment rate (bottom scale).

Click to enlarge.

As seen in the chart, real GDP per capita growth kind of sucks right now. Note how far below the red regression trend line we are. Considering how much the unemployment rate has dropped, we should generally be doing much, much better than this. 4% real GDP per capita growth would look about average (vs. our 1.6%).

That's not the worst news though. We know with absolute certainty that the unemployment rate cannot fall forever at its current pace. At some point we'll be on the right side of this chart again. That's just a given. We better not be under the red regression line when that happens or there will be many long-term buy-and-hold investors and pension funds screaming bloody murder. But, as they say, enjoy the "sluggish" party while it lasts.

Why are so many investors optimistic? Lever up? I wouldn't lever up this crappy growth story unless my life depended on it. I think there's a perfectly reasonable explanation why treasury yields are low. To put it bluntly, this economy sucks and will continue to suck over the long-term. The long-term treasury bond market and I are in complete agreement on this (and I have put my money where my mouth is).

That said, it is just an opinion that this crappy economy will continue to suck in a most crappy way over the long-term, that it will continue to suck for short-term savers, and that it will eventually suck for most investors (yet again). Your opinions may vary. This is not investment advice.

See Also:
Soft Landings vs. Hard Landings

Source Data:
St. Louis Fed: Custom Chart


Anonymous said...

Wondering what this graph (actually the regression-line) would look like with the various other unemployment U numbers?

Stagflationary Mark said...


Great question!!

The data doesn't go back as far for that, but I can offer a hint.

Unemployment Rate Change vs. U6 Rate Change

Note that the U6 has really been falling lately. You'd therefore be tempted to think we should be doing even better right now.

In any event, we certainly can't chop 2% off the U6 rate each and every year going forward. When that "growth" engine is done, things will get interesting. And when I say interesting, I probably mean terrifying, lol. Sigh.

Gallows humor.

Stagflationary Mark said...


Out of curiosity, I took the U6 Rate and placed a parabola on it since the peak.

If we extrapolate that parabola out, it is expected to hit 0% in January 2020. There's no way it will ever make ti to 0% of course. The trend will fail sooner than that. It will be interesting to see what causes the failure. Sigh.