Growth at What Cost?

Jeff Hybiak, CFA -

GDP growth surprised nearly everyone in the 1st quarter rising 3.2% in the past year. The president of course pointed to his economic policies as the cause of this “great” increase. Never mind the fact the long-term average growth rate is 3.1%. This has been the worst economic recovery in the history of our country, so “average” growth may appear to be “great” to some. What pretty much everyone is ignoring is the amount of debt that is being used to fuel this growth rate.

 

[Side note: Our economic model continues to show slowing growth. Digging into the numbers, the official GDP growth was the direct result of a large increase in inventories. Our internal strength measures show there is little demand for all of this inventory, so we are likely to see GDP growth drop to the mid 2% range in the 2nd half of the year.]

 

Looking at the 2018 debt numbers, it appears things are getting worse for our country at an accelerating rate.

 

  • Since the expansion began the economy has grown by $3.6 Trillion. Our country accumulated $15.3 Trillion in debt during that time or $4.28 of debt for every $1 of economic growth.

  • In 2018 the economy grew by $539 Billion. In 2018 our country accumulated $2.9 Trillion of debt or $5.36 of debt for every $1 of economic growth.

 

Remember, debt can be useful if used to fight a cyclical slowdown so long as it is paid back during the cyclical growth period. That hasn’t happened this time around meaning our country will not have the capacity to fight the inevitable slowdown that lies ahead. The 2017 tax cuts clearly did not pay for themselves in 2018 as the deficit expanded at a far faster rate than the economy. With the temporary boost from the cuts all but gone, the amount of debt necessary to grow the economy will be even greater in the years ahead. It’s not just the government borrowing money at a ridiculous rate. Corporations, households, and banks have all contributed. (Keep in mind this DOES NOT include the $19 Trillion unfunded Social Security liability or the $30 Trillion unfunded Medicare liability)

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Debt is future spending brought forward. The re-payment of the debt will only hurt economic growth in the future. The stock market is not ready for the shock that will come when lenders/investors realize this type of borrowing does not justify a stock market trading at all-time highs and pricing in 10%+ earnings growth in the years ahead. We’ll continue riding this wave higher for as long as possible and will be ready to implement our defensive measures as designed inside each Scientifically Engineered Model.