Why The Economic Recovery Has Been So Slow

Many market watchers continue to express surprise over the modest pace of recovery in the US economy since 2009. Are they right to expect growth to have been more robust?

The short answer is no.

The 2008 recession is not comparable to other downturns since the end of World War II. Therefore, expecting the recovery to track the pace of prior recoveries is misguided.

With few exceptions, post-war recessions have primarily been led by inflation and monetary tightening. Some of these came as a result of war: the Korean War in the 1950s and the Vietnam War in the 1960s, when government spending contributed to price hikes. In the 1970s and early 1980s, the primary cause for inflation were sharp spikes in the price of oil. To a lesser degree, that was also the case in 1990.

While 2000-02 is remembered now for the substantial fall in equity prices, the economic downturn was actually mild. The dot-com bubble had burst and then 9/11 took place. But GDP contracted by just 0.3% and unemployment peaked at just 6.3%. It was a stock market recession more than an economic recession.

The economic contraction in 2008 was nothing like any of these recessions. Inflation and monetary tightening had nothing to do with the recession: core CPI peaked at just 2.5%.

Fund Managers' Current Asset Allocation - September

Every month, we review the latest BAML survey of global fund managers. Among the various ways of measuring investor sentiment, this is one of the better ones as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $700b in assets.

First, here is a quick recap of the story over the past few months:

Fund manager equity allocations reached an extreme in July. At +61% overweight, it was the second highest since the survey began in 2001. This was a clearly identified risk to near term equity performance (post).

In early August, the Euro 350 dropped 8% and SPX dropped 5%. In response, equity allocations fell to +44% overweight.

Moreover, fund managers moved to cash, with cash levels shooting up to 5.1%, also an extreme. As we specifically noted a month ago (post), this was a strong positive: cash above 5% has been close to equity lows in 2002, 2003, 2011 and 2012 (green shading).

Which brings us to the current survey of fund managers' positions. SPX and the Euro 350 rose more than 5% in the past month. Fund managers have responded by raising their global equity exposure to +47% overweight and reducing their cash to 4.6%.

Business Insider: Top Finance People to Follow

Many thanks to the people at Business Insider for including us in their annual list of the Top Finance People to Follow for a second year. The full list is here.

Weekly Market Summary

Today's widely anticipated employment report (NFP) reaffirmed that growth remains positive but tepid. 142,000 jobs were added in August, well off the expected print of 220,000 new jobs.

Was this "miss" really a surprise? No.

This month's print follows those of 84,000 in December and 288,000 in June. Moving between extremes like these is nothing new: it has been a pattern during every bull market. Since 2004, every NFP print near or over 300,000 has been followed by one near or under 100,000 (circles).

We should also note that a "miss" of 80,000 jobs is equal to 0.05% of the US workforce. Assuming greater forecasting precision is folly.

The largely ignored bigger picture is more instructive. In the past 12 months, NFP has averaged 207,000. That is close to the middle of the range in the chart above.

September Macro Update: Trend Growth of 2% Real

In May we started a recurring monthly review of all the main economic data (prior posts are here).

Our key message has so far been that (a) growth is positive but modest, in the range of ~4% (nominal), and; (b) current growth is lower than in prior periods of economic expansion and a return to 1980s or 1990s style growth does not appear likely. This is germane to equity markets in that macro growth drives corporate revenue and profit expansion and valuation levels.

This post updates the story with the latest data from the past month.

The overall message remains largely the same. Employment is growing at less than 2%, inflation and wages are growing around 2% and most measures of demand are growing at roughly 2% (real). None of these has seen a meaningful and sustained acceleration in the past 2 years. The economy is continuing to repair, slowly, after a major-financial crisis. This was the expected pattern.

We'll focus on four categories: labor market, inflation, end-demand and housing.


Employment and Wages
The August non-farm payroll (142,000 new employees) was at the lower end of a 10-year range. (The past 12-month average of 207,000 was, on the other hand, right in the middle of the range). This follows prints of 84,000 in December and 288,000 in June. Moving between extremes like these is nothing new: it has been a pattern during every bull market. Since 2004, every NFP print near or over 300,000 has been followed by one near or under 100,000 (circles).