The question of where American productivity growth has gone is plaguing policymakers. Without productivity growth, the economy must rely on credit growth to boost GDP. Credit growth is like food. If you eat a normal amount, you’ll be fine. If you eat too much food, you gain wait and become unhealthy. If the debt piles too high there’s side effects, namely a deleveraging which causes a recession. Part of the reason there have been three bubbles since the late 1990s is because of low productivity growth. The second reason is low interest rates. It would be great if the economy was able to get back to being more productive. Obviously, readers can’t do anything to change policy, but we can alter our investments based off whether the policymakers look to be headed in the right direction in terms of solving the issues.

The charts below show that the global productivity growth rate is slowing, so it’s not just America which is stagnating. The first chart shows that the advanced economies haven’t recovered to the rate they were growing at before the financial crisis. As you can see, the five-year average productivity growth rate is less than half the rate it was growing at in the early 2000s. The growth rate is now hovering around the unchanged mark, just like it is in America. American productivity growth fell 0.2% in 2016. Just like in America, the other advanced economies have slowing population growth rates which means GDP growth is tough to come by. One of the worst situations is Japan which had its population decline by 0.22% in 2017. When its economy grows in the low single digits it’s considered great because the GDP growth per capita is larger than that.

This low productivity growth in the advanced economies reinforces my point about how S&P 500 earnings can’t grow above its trend while American GDP grows below its trend. It’s true that many firms have more international than domestic sales, but the international countries are seeing the same weakness America has. There is no magic going on overseas which can boost earnings growth indefinitely. This weakness is behind the central bank balance sheet expansion in the developed world. The bankers try to claim that it’s due to the financial crisis, but the financial crisis ended in 2009. This money printing is happening because of low productivity growth, but it hasn’t healed it.