Importantly, if consumer debt somehow remains constant at current nosebleed levels going forward, U.S. GDP will grow at a rate 1% – 1.25% below average growth rates since 1980. If however consumers pay-down debt at the same pace that they accumulated it from 1980 – 2008, GDP growth will drop by a further 1% – 1.25%. This would then shave a total of 2% – 2.5% from GDP growth potential, which puts likely growth rates for U.S. GDP between 1% and 2% p.a. for the foreseeable future, barring the creation of another consumer credit cycle.
Interestingly, Japanese GDP growth averaged 1.9% during its ‘Lost Decade’ from 1990 – 2000 after posting 10+ years of 3 – 4% growth leading up to the Nikkei’s 1989 peak. Despite aggressive policies by the BOJ to bring rates to zero and a massive buildup in Japanese government debt to offset corporate and household balance sheet rebuilding, Japanese GDP was exceedingly volatile through the 1990s and share prices dropped by 65% over the decade. Of course, they are almost 75% below their 1989 peak today.
Given this anemic consumption scenario, and the Japanese template for a debt deflation scenario, investors should be asking to what degree the market is discounting a long period of slower economic growth. With consumers retrenching, boomers retiring, and government indebtedness likely to necessitate higher corporate and personal taxes in the future, is it likely that stock market valuations will continue to hold at 1980 – 2008 levels relative to the size of the economy? Or is it possible that they may revert to levels that dominated for most of the last century.
Source: Ned Davis Research