Jeremy Grantham's latest quarterly letter is out, in which he discusses, as
the title suggests, the road to zero US growth. From
the punchline:
With a little luck, U.S. GDP growth (even after an increasing squeeze from rising resource costs and environmental damage) should remain modestly positive, even out to 2030 and 2050, in the range of 1% at the high down to a few basis points at worst. Increasingly, the growth will be qualitative. Qualitatively, growth is likely to be limited to services as manufactured goods will bear the brunt of the rising input costs. It would certainly help a lot if considerable changes were made in how GDP is measured. It needs to be closer to what we all apparently think it is already: a reasonable measure of the utility of useful goods and services.
The key issue will be how much unnecessary pain we inflict on ourselves by defending the status quo, mainly by denying the unpleasant parts of the puzzle and moving very slowly to address real problems.
This, unfortunately, is our current mode. We need to move aggressively with capital – while we still have it – and brain power to completely re-tool energy, farming, and resource efficiency. We need to do all of this to buy time for our global population to gracefully decline. It can certainly be done.
Summary:
·
The U.S. GDP growth rate that we have become
accustomed to for over a hundred years – in excess of 3% a year – is not just
hiding behind temporary setbacks. It is gone forever. Yet most business people
(and the Fed) assume that economic growth will recover to its old rates.
·
Going forward, GDP growth (conventionally measured)
for the U.S. is likely to be about only 1.4% a year, and adjusted growth about
0.9%.
·
Population growth that peaked in the U.S. at over 1.5%
a year in the 1970s will bob along at less than half a percent. This is pretty
much baked into the demographic pie. After adjusting for fewer hours worked
per person, man-hours worked annually are likely to be growing at only
0.2% a year.
·
Productivity in manufacturing has been high and is
expected to stay high, but manufacturing is now only 9% of the U.S. economy,
down from 24% in 1900 and 15% in 1990. It is on its way to only 5% by 2040 or
so. There is a limit as to how much this small segment can add to total
productivity.
·
Growth in service productivity in contrast is low and
declining. Total productivity is calculated to be just 1.3% through 2030, if we
use current accounting methods.
·
However, current accounting cannot accurately handle
rising resource costs. Spending $150-$200 a barrel in offshore Brazil in the
future to deliver the same barrel of oil that cost the Saudis $10 will result
perversely in a huge increase in (Brazilian) GDP. In reality, rising resource
costs should be counted as a squeeze on the balance of the economy, as they
lower our total utility.
·
Measuring the non-resource balance of the economy
produces the correct effect. The share of resource costs rose by an astonishing
4% of total GDP between 2002 and today. It thus reduced the growth of the
non-resource part of GDP by fully 0.4% a year.
·
Resource costs have been rising, conservatively, at 7%
a year since 2000. If this is maintained in a world growing at under 4% and a
developed world at under 1.5% it is easy to see how the squeeze will intensify.
·
The price rise might even accelerate as cheap
resources diminish. If resources increase their costs at 9% a year, the U.S.
will reach a point where all of the growth generated by the economy is used up
in simply obtaining enough resources to run the system. It would take just 11
years before the economic system would be in reverse! If, on the other hand,
our resource productivity increases, or demand slows, cost increases may
decelerate to 5% a year, giving us 31 years to get our act together. Of course,
with extraordinary, innovative breakthroughs we might do even better, but we
certainly shouldn’t count on that. (Bear in mind that we don’t even know
precisely why the prices started to rise so sharply in 2000.) Excessive optimism and doing little could
be extremely dangerous.
·
For a few years fracking will add helpfully to growth:
my guess is that the benefit will peak at about 0.5% within fi ve years, but be
modest over longer periods. The key concept here for understanding growth is to
know when the maximum upward push will occur. (See Appendix A.)
·
Increasing climate damage, reflected mainly in food
prices and flood damage, is going to increase. With any luck this will not be
severe before 2030 (we allow for a 0.1% setback) but it is very likely to
accelerate between 2030 and 2050. A
great deal will depend on our responses.
·
The bottom line for U.S. real growth, according to our
forecast, is 0.9% a year through 2030, decreasing to 0.4% from 2030 to 2050
(see table on Page 16). This is all done presuming no unexpected disasters, but
also no heroics, just normal “muddling through.”
·
GDP measures must be improved so that they begin to
measure output of real usefulness or utility. The current mish-mash of costs
and of “goods” and “bads” produces poor and even damaging incentives.
·
Accurate measurements of growth must eventually
include the full costs of running down our natural assets. True income (said
Hicks) is meant to allow for sustained productive capacity, which our current
measures clearly do not. If they had done so the developed countries might well
have been in reverse for the last 20 years.
·
Investors should be wary of a Fed whose policy is premised
on the idea that 3% growth for the U.S. is normal. Remember, it is led by a guy
who couldn’t see a 1-in-1200-year housing bubble! Keeping rates down until
productivity surges above its last 30-year average or until American fertility
rates leap upwards could be a very long wait!
·
Some of the investment implications of this low growth
outlook and the Bernanke optimism will be addressed next time (with luck!).
Full letter (pdf):
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