Jeremy Grantham’s Road to Zero Growth
The latest quarterly letter by GMO’s Jeremy Grantham was released this week. He paints a very grim picture for future economic growth in the U. S. stating, “The U.S. GDP growth rate that we have become accustomed to for over a hundred years – in excess of 3% a year – is not just hiding behind temporary setbacks. It is gone forever.” Grantham sees long-term GDP growth gradually winding down to 1% annually in the U. S.; a sobering assessment for stock market bulls.
Grantham lays much of the blame on the lame growth prospects to the rising cost of resources:
Resource costs have been rising, conservatively, at 7% a year since 2000. If this is maintained in a world growing at under 4% and a developed world at under 1.5% it is easy to see how the squeeze will intensify.
Grantham takes a jab at Ben Bernanke (rightfully so):
Investors should be wary of a Fed whose policy is premised on the idea that 3% growth for the U.S. is normal. Remember, it is led by a guy who couldn’t see a 1-in-1200-year housing bubble! Keeping rates down until productivity surges above its last 30-year average or until American fertility rates leap upwards could be a very long wait!
Grantham also believes demographics will play a role in the growth rate decline as numbers of workers entering the workforce gradually diminish and female labor force participation growth stalls out further.
Grantham expounds on economic consultant Andrew Smither’s notion of the “Bonus Culture,” in which companies, instead of engaging in capital expenditures to gain market share, resort to purchasing their own stock. He conservatively reckons this factor will reduce growth by 0.2% per year.
Grantham’s letter is 16 pages long and chock full of interesting observations including his expectations for service versus manufacturing sector productivity growth, the prospects for the unemployed, his hopes for a monumental reduction in the monetary and environmental cost of basic ground transportation via technological innovation, and his concerns regarding global climate change.
Source (requires free registration): GMO