Perspectives Blog

Rebalancing the U.S. economy

Marie M. Schofield, CFA, Chief Economist and Senior Portfolio Manager | January 13, 2014

…ar ago, the U.S. budget deficit was 6.5% of gross domestic product (GDP). It will likely fall to less than 4% of GDP in last year’s fourth quarter and looks to decline to something near 3% this year. Receipts are up 13% and outlays are down 5.5% in the last year—this is admirable progress. The easing fiscal drag will add to GDP via less subtraction. Indeed, private sector real GDP growth (GDP less government expenditures) is up 3% in the last 12…

Gaps, not growth

Zach Pandl, Portfolio Manager and Strategist | February 25, 2014

…growth is above potential, and worsens when growth is below potential: Output Gap = β * (GDP growth – Potential GDP growth) where beta is the Okun’s Law coefficient. The relationship is also commonly written in terms of the unemployment gap—the difference between the unemployment rate and its structural rate. Okun’s Law is at the center of today’s biggest policy debate. Since the recovery began in the second half of 2009, GDP growth has increase…

Interest rates in a highly indebted economy

Zach Pandl, Portfolio Manager and Strategist | October 13, 2014

…es in debt ratios are a function of three variables: (1) average effective interest rates, (2) nominal income or GDP growth and (3) the savings rate (or in public sector terms, the budget balance; in either case, excluding interest payments). We again show this relationship in Exhibit 5. On the x-axis is the difference between nominal interest rates and nominal GDP growth; on the y-axis, the change in the debt stock as a percent of GDP. The solid…

Neutral funds rate going up?

Zach Pandl, Portfolio Manager and Strategist | May 16, 2014

…ver the last five years—which economic theory says should translate into a lower neutral funds rate. On average, GDP growth has increased only about 2.25% recovery-to-date, and yet measures of slack have improved substantially. Thus, trend growth must have been well-below historical norms. Our modelling suggests potential growth may have been as low as 1% in recent years (Figure 1). Figure 1: Implied potential GDP growth We also have sympathy fo…

Income inequality, disinflation and profit growth – the role of globalization

March 10, 2014

…fits generated by U.S.-based firms outside the United States (shown in Exhibit 2) has risen from less than 1% of GDP to around 2.5% of GDP. Exhibit 2: Profits generated outside the U.S. by U.S. firms as % of U.S. GDP Source: Bureau of Economic Analysis, Threadneedle, September 2013 The economic, policy and investment implications are profound but also familiar. With citizens of EM a good deal poorer than their developed market neighbors, and wit…

Quality milestone in the European recovery story

March 17, 2014

…ets, we foresee a period of low inflation and low interest rates in Europe. Finally, we find the differential in GDP estimates between Europe and other regions globally particularly interesting. The current consensus is that the eurozone will see GDP growth of 1.1% in 2014, compared with 2.9% in the U.S., and 6.3% in Asia. Should this growth gap narrow, we could see further inflows into European funds, and we believe this is one of the reasons wh…

U.S. rates – Waiting for the sound

Zach Pandl, Portfolio Manager and Strategist | May 5, 2014

…oss domestic product (GDP) is a deeply flawed tool for tracking economic growth. But the contrast between the Q1 GDP report and other available data on the economy was nonetheless remarkable. According to the Bureau of Economic Analysis, real GDP growth was just 0.1% annualized in the first quarter. Some analysts think this figure will eventually be revised into negative territory. In contrast, our own measure of real economic activity—which uses…