Last month’s column reviewed four long-term trends that have long slowed US economic growth and suppressed equity investment returns and will continue to do so, perhaps even more, in coming years. They are excess public spending and excess public regulation of all kinds. It also reviewed two trends that helped economic growth and returns before the turn of the century but since then have retarded it: growing debt in all major sectors of our economy (especially problematic now with interest rates again rising) and demographic and labor-force participation trends that previously brought more people into market labor forces but are now drawing them away.
This column explains one more factor that has turned this century and some recent exogenous shocks that are also depressing growth and returns. Then it discusses the effects specifically on equity returns and, finally, how Nevada growth may differ from that of the US economy.
Economic globalization (trade and foreign direct investment), plus other nations’ economic output grew rapidly with worldwide embrace of economic liberalism after WWII and the subsequent decline of communism and socialism. All this provided a great boost to US economic growth until the Great Recession. Since then, world economic growth has slowed, as have trade and foreign direct investment, becoming a third factor that shifted from a growth booster to retardant. President Trump’s trade wars exacerbated these problems, while also diminishing fairness within our economy. (Consumers pay more for fewer choices, while crony capitalists and labor unions benefit.) Other countries’ slow growth has been due greatly to the same factors that have slowed our growth: excess public spending and regulation, plus growth of all debt; and demographic and workforce participation changes, especially population implosion and slow growth. China is the second largest economy, but its one-child policy and return to communism, plus its economic, diplomatic and military aggression, will slow its future growth. For years, it has already overstated its actual growth.
Various one-off domestic factors – the COVID pandemic, resulting lockdowns and extensive rise of work at home – plus exogenous negative foreign factors – aggression by Russia, China, OPEC, Iran, North Korea and others – have caused serious dislocations, reduced economic growth and caused financial chaos in the last three years. The pandemic reduced productivity and output directly, and the destructive and unnecessary lockdowns, masks, etc. also had serious growth retarding effects. The rise of work at home merely accelerated a trend that was coming because of technological progress, but it caused immediately dislocations that otherwise would have been spread over years with less hurried and forced changes. Foreign countries’ military and other aggression have caused mal-investment and deployment of resources that diminish, not cause economic growth.
Expected economic growth is a key direct factor in all models of expected equity returns. For the last decade, interest rates have been kept low by Federal Reserve policy and markets. This has offset the effect of slow economic growth on firms’ equity returns. However, after 40 years of interest rates declining to record low levels, they are now turning back up. So, equity returns will be tepid for the foreseeable future, even with high inflation. Some outstanding financial economists agree with my forecast that endowments for funds such as Nevada PERS and NSHE endowments should hope for five percent annual net returns.
The net effect of all this is slow and perhaps negative US economic growth and poor returns for at least the next few years. No notable Nevada-specific factors are likely to offset these trends. The resumption of rapid housing construction in Nevada and the Southwest has already abated, and decline has begun. Price cuts have set in and waiting times for sales and rentals are decreasing, despite continuing inflation. So, if anything, the national trends will be more severe here.
Correction: Last months’ column said interest rates reached their highest levels in 40 years. It should have referenced inflation rates, instead.
Ron Knecht is Senior Policy Fellow at Nevada Policy Research Institute.
