GMO’s Jeremy Grantham says those waiting for the U.S. to return to the 3%+ growth rates it has averaged over the past hundred years are going to be disappointed.
“The U.S. GDP growth rate that we have become accustomed to for over a hundred years … is not just hiding behind temporary setbacks,” Grantham writes in his third-quarter letter. “It is gone forever. Yet most business people (and the Fed) assume that economic growth will recover to its old rates.”
Grantham estimates that GDP growth going forward will be about 1.4% per year, using conventional measures. But he says that doesn’t even tell the whole story. Current measuring techniques don’t properly account for the cost of resources. Resources costs have been rising by 7% per year, using a conservative estimate, since 2000, Grantham says, adding that that figure “might even accelerate as cheap resources diminish. If resources increase their costs at 9% a year, the U.S. will reach a point where all of the growth generated by the economy is used up in simply obtaining enough resources to run the system. It would take just 11 years before the economic system would be in reverse! If, on the other hand, our resource productivity increases, or demand slows, cost increases may decelerate to 5% a year, giving us 31 years to get our act together. Of course, with extraordinary, innovative breakthroughs we might do even better, but we certainly shouldn’t count on that. … Excessive optimism and doing little could be extremely dangerous.”
Accounting for the resource issue, GMO estimates U.S. growth will be about 0.9% through 2030, and then decrease to 0.4% for the next two decades. In addition to rising resource costs, Grantham says declining population growth will also inhibit growth. He offers a variety of intriguing data about population, productivity, and economic growth, as well as some insight into the impact that “fracking” to obtain natural gas could have on the economy. You can read the full letter on GMO’s website.