A new report from Morgan Stanley chief economist Vincent Reinhart and his team paints a picture of a new economic normal that features GDP growth of just 2%, half a percent lower than previous estimates. Part of the cause for this adjustment, according to the report is:
“In the past few years, population growth has declined, labor force participation is on a secular downtrend, and productivity is increasing at a slower clip.”
Peter Kenny, CEO of the Clearpool Group, joined Breakout to parse the report. He notes that the labor force participation rate in particular is at a 35 year low and is itself a new normal, adding, "it has nothing to do with our boom and bust cycle that we’ve been through in the last 14 years. It has a lot to do with the maturation of our economic growth and the rate of our growth coupled with productivity.”
In short a lower participation rate leads to a slower growth economy and if the former isn’t changing, and Kenny doesn’t think it will, the latter can’t change either.
So the next logical question is what, if anything, can monetary policy and namely the Fed do to juice the economy in this kind of environment?
“No one is really sure what the Fed intends to do about that,” says Kenny. “I’m not really even sure that the Fed can do much about this because this is a very very long term macro economic trend.”
Kenny notes that this change in labor force participation (and its impact on GDP) has a lot to do with demographic growth and a transition to different forms of employment within the economy, two things the Fed can’t do much about.
But fear not, at least in the short term. The markets are poised to take this change in stride for now.
“I don’t think it’s going to have a significant impact on the markets’ performance this year,” Kenny says. “Though the economy may only expand 2-3%, the market will do much better than that.”
How well? Check out part two of our discussion with Kenny tomorrow morning.
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