over 3 years ago • 2 mins
The American economy may have only just experienced its sharpest quarterly contraction in history – but if one interesting indicator is to be believed, economic growth could rocket back beyond most forecasters’ wildest dreams 🚀
On an annualized basis, the US economy shrank 31.7% in the second quarter of 2020 compared to a year before. A revised reading showed the fall in “gross domestic product” (GDP) wasn’t quite as bad as initially thought – but it was still by far the worst on record. The second consecutive quarter of negative growth also marked the advent of recession.
While analysts expect third-quarter growth to come in at a record high of around 20%, the US Federal Reserve estimates that the economy will end 2020 having shrunk by 6.5% overall. Official estimates are that growth will then hit 5% in 2021 before settling down at an average annual rate of around 4% until 2030.
But investment research firm Leuthold Group questions that view. In new research this week it points out that, since 1955, a ratio of the US household personal savings rate to the country’s unemployment rate has moved pretty closely in line with the annualized average GDP growth rate over the subsequent decade…
The savings/unemployment rate ratio rose rapidly during the 2010s. Based on its historical parallels with subsequent GDP, pushing this data forward by 10 years (or 40 quarters) suggests that US economic growth could end up around 8% by 2030 – double what economists expect.
The historic synchronicity may be due to savings rates’ reflection of future demand growth and unemployment’s reflection of resource availability; their ratio, in other words, provides an estimate for US economic demand relative to supply. When it’s high, future job creation and rising incomes may look more likely.
If – and it’s by no means certain – the relationship to GDP growth holds, then a booming economy should, all else equal, lead to companies’ profits and stock prices increasing, benefiting those invested in American shares. Still, unemployment is historically high at present. It’s complicated, but reducing this could lead to inflation shooting up – eating away at the “real” value of all that tasty economic growth 🤔
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