We lifted the title for this post from Ed Yardeni who runs Yardeni Research, an investment strategy research firm. Ed offers a checkup on an economic theory debate that has been simmering for several years in the economics community, nicely tucked away from the wider world.
The crux of the issue is finding an explanation for the frustratingly slow pace of economic recovery coming out of the crisis of 2008. Emerging from the ensuing recession, the U.S. economy was forecasted to grow in the same 3-4% range as in other recoveries. We crossed 3% a quarter here and there, but overall annual growth rates hovered around 2%. Aggressive forecasts were constantly scaled back, but the answers to the shortfalls weren’t obvious.
In 2013, Larry Summers, a Harvard professor, gave a speech that suggested the United States was stuck in an extended period of secular stagnation. This is the idea that our economic problems weren’t a product of the business cycle, but are permanent drags on the modern economy. The term was coined by economist Alvin Hansen in 1938 to explain the sluggish recovery throughout the preceeding decade. The core of Hansen’s thesis stated that slower population growth and a lower speed of technological progress would permanently thwart economic growth. World War II helped to change these circumstances, but a long peacetime expansion that followed put the theory on the shelf to gather dust, until now.
Kenneth Rogoff, also a professor at Harvard, sits on the other side of the issue, dismissing secular stagnation as a temporary phenomenon and explains our economic malaise through a different lens. In 2015, Rogoff posted an article titled “Debt supercycle, not secular stagnation.” The foundation of the theory rests on the fact that 2008 was not simply a recession, but a recession accompanied by a deep, systemic financial crisis. That crisis was precipitated by many factors, but the most impactful was overleverage. Postrecession economies in this condition are dragged down by high levels of debt that hold back growth until deleveraging is complete. Sometimes this process can take longer than any one of us wants or expects.
Some of the data being released as we move toward 2018 suggests we may be at that point now. Purchasing Manager Indexes across the world, economic health indicators for a country’s manufacturing sector, are all looking up. German factory orders from foreign buyers are at a record high. Eurozone retail sales have been on an upward trend since 2013. S&P 500 companies, who earn almost 50% of their revenues overseas, continue to push their forward revenues higher from what was an already high level in 2017. And global stock markets are moving upward in tandem for the first time in many years.
While not yet conclusive, more and more data is telling us that secular stagnation won’t suffice to explain anemic economic growth now, any more that it could in 1938, albeit for different reasons. Financial markets can turn quickly, but economies don’t. Sometimes we have to force ourselves to step back, employ some patience, and take the long view.