Article / 20 May 2016 at 15:15 GMT

US growth is a shadow of past glories, so no need to hike rates

Managing Partner / Spotlight Group
United Kingdom
  • US economic growth is down to only annualized 0.5%
  • GDP gains in Q1 2016 are the most anaemic performance since Q1 2014 
  • Obama will face the 4th worst growth record of any administration 
  • There is no justification for a June rate hike
  • Delaying a move, even until the start of the second half would be far more sensible

By Stephen Pope

In a weeks’ time the economic calendar will release the latest look at US economic growth. It is expected that the data for Q1 2016 will be marked higher at 0.8% from the initial estimate of 0.5%.

To put this in a long, historical context, consider the path of US GDP growth since 1950, as shown in the following chart.
US Growth
Source: Bureau of Economic Analysis

From 1950 until the mid-1970’s the US economy managed to book GDP growth that averaged almost 4.5% per annum. However, look at the chart from the Reagan era onwards and it is clear to see that such an average growth rate is far from sight.

US GDP Growth Slows to 0.5% in Q1

The US economy expanded by an annualized 0.5% quarter-on-quarter during the first three months of 2016 i.e. Q1. This was far lower than the 1.4% clip recorded in Q4 2015 and was shy of the market expectation of 0.7%.

Of course, this was the advanced estimate released by the Bureau of Economic Analysis and next week the update, based on a more complete picture should reveal growth was actually 0.8%. However, one cannot escape the fact that GDP gains in Q1 2016 will be recorded as the most anaemic performance since Q1 2014 when the economy contracted 0.9%.

Looking back at the chart one will note that following the second worst slump since WWII that hallmarked the Carter years the economy recovered under Ronald Reagan’s presidency. From 1981 through to the end of the George W. Bush era in 2009 growth had averaged approximately 2.8%, as the deep trough that sprang from the financial downturn on Wall Street did not hit main Street until Barak Obama had been sworn into office.

Jimmy Carter probably rather wants to talk about him having received the 
Nobel Peace Prize than the economic performance during his governance, 
which Stephen Pope describes as "the second worst slump since WWII". Photo: iStock

On Obama’s watch

If the rate of real economic growth is a critical factor in shaping the well-being of the American people and any legacy of a President, then President Barack Obama looks hard pressed to oversee an average growth rate of 2.0%. In fact, his record will be closer to just 1.6%, giving him the fourth worst record of any administration.

Put another way, Obama will be the only President in history who was unable to oversee at least one year where GDP growth exceeded 3.0%. He would rank only above Herbert Hoover (-5.65%), Andrew Johnson (-0.70%) and Theodore Roosevelt (1.41%).

This should be the backdrop for the forthcoming election which is now almost certainly going to be a straight race between Hillary Clinton for the Democrats and the Republican’s Donald Trump. Mrs Clinton is trying to position herself as the best defender of President Obama's legacy as she claims she will preserve, protect and defend Obama's achievements. 

However, one has to wonder if that is wise given the poor economic track record he has and the fact that a poll by “Real Clear Markets” on the direction of the country has 65.4% saying the US is on the wrong track with just 26.0% saying it is following the right path.

The President knows he is the twilight of his term and is keen to be seen as doing all in his power to support the next Democrat nominee. However, the data on real GDP growth does not really support him when he claims:

“…I actually compare our economic performance to how, historically, countries that have wrenching financial crises perform, …By that measure, we probably managed this better than any large economy on Earth in modern history. …”

His would be successors are not in agreement as Donald Trump said:

“…we’re a third-world nation. …”

If that was to be expected, what was not was the comments from Hillary Clinton:

“…Many are still barely getting by…”

View from the Fed

Given what I have written about real GDP growth I am somewhat puzzled as to what data the Federal Reserve is reading when New York Federal Reserve President William Dudley said that the economy would soon be enough to warrant an interest rate increase in June or July:

“…We are on track to satisfy a lot of the conditions for a rate increase…”

Dudley's comments reinforced the notion that rate increases are coming soon, with the minutes of the Fed's April meeting, released on Wednesday, suggested most policymakers felt a rate increase could be needed in June, with officials saying they first wanted to see signs the economy was still strengthening.

Since the publication of the minutes’ investors have altered their trading positions on the next rate increase to July from September, according to CME Group. They say that calculations based on prices for Fed funds futures contracts imply investors see a 30% chance rates will rise in June, up from 19% before the minutes were released. 

Tuesday's stronger than expected reading on consumer prices at 0.4% in April from 0.1% in March is being cited as a reason behind the market move on Fed Funds Futures, however, the Fed's preferred measure of overall inflation, the core PCE deflator, remains below target, suggesting patience may still be a virtue. To support that I look at the New York “Empire State” Manufacturing Survey which for May was booked at -9.02 from 9.56 previously.

Growth rates in the States are lacking behind earlier performances. Photo: iStock 

Oil considerations

Inflation has been pushed higher by the recent spike in oil, but this will not remain near $50/barrel. The price has nearly doubled from its lows of $26.05/barrel earlier in the year. Much of this is down to supply outages in Libya, Nigeria, Iraq and most recently Canada. Thus there has been a temporary deficit in daily global production. That does not negate the overall situation of excess supply which remains near record levels.

There are steadily increasing costs for oil storage, which is in greater demand than oil itself. I expect oil to fall back toward at least $30 by the end of the year.

The US economy appears to be decelerating and the developed world and BRIC nations are far from operating at full capacity. Even if the data next week shows an improvement in GDP during Q1 there is no need for the Fed to be too trigger happy. There is no justification for a June hike. Delaying a move, even until the start of the second half would be a far more sensible strategy.

— Edited by Clemens Bomsdorf

Stephen Pope is managing partner at Spotlight Ideas. Follow Stephen or post your comment below to engage with Saxo Bank's social trading platform.

21 May
BuySellBuySell BuySellBuySell
Most reasonable and fair minded economic commentators would agree that Obama has done a pretty good job managing the US economy under difficult circumstances. To try and use an average 1.6% growth rate as a measure of poor economic policies is truly nuts Stephen and is a strange deviation from your usual shrewd analysis. It sounds like a very biased view on the bloke. Cherry picking one particular metric and using it in a fairly narrow way like that if surely missing the bigger picture and is misleading and inaccurate. I suspect other important economic metrics like employment, wages, tax receipts, etc plus within the context of the 2008 crises and general poor international economic environment, would paint a different picture of Obama's performance.
22 May
bombwe bombwe
I would agree with you, BuySellbuySell, America's economy was not in that good a shape when Obama took over presidency, if memory serves me correctly. Further, would one consider Donald Trumps assessment an educated point of view?


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