Morgan Warstler sent me the following story by Matthew Boesler:
The consensus on Wall Street is that U.S. economic growth finally takes off in 2014, which will give the Fed the opportunity to taper.
But what if it doesn’t? Consider this: some believe the U.S. economy is actually entering a “late-cycle stage” — in other words, the upward acceleration may not be coming.
“A growing number of indicators are showing late-cycle dynamics, and while this need not imply a recession it might well indicate a shift into a period of slower growth and lower inflation,” says Deutsche Bank global head of rates research Dominic Konstam.
“So much for animal spirits,” he writes in a recent note to clients:
. . .
Labor input is high relative to productivity, which typically predicts a sharply slower labor market 2 years ahead. In fact, simply conditioning on the relative gaps of labor input to productivity when it is negative predicts an almost stagnant labor market. In the absence of further fiscal or monetary stimulus, a lower household savings rate, or some combination of these, the implication is lower, not higher, rates.
“This is hardly a recipe for above trend growth,” says Konstam. “We note that recent trend real growth is less than 2%, so if inflation is stuck in the 1-1.5% range, then nominal growth is stuck closer to 3%, not 4%. In that environment, nominal yields become restrictive over 3% and become inhibitive to growth.”
There’s a reason NGDP growth slows “late-cycle.” The Fed tightens monetary policy to cool an overheated economy. Falling NGDP growth is tight money. Tight money is falling NGDP growth.
But the economy is not overheated today.
As I said a few days ago, MOAR.