Jeremy Grantham is founder and chief investment strategist at Boston money manager GMO. He’s a value investor, a member of that peculiar club of speculators who like to dig up unsexy companies that generate solid profits but little enthusiasm from the market. And he’s generally known in financial circles as being a pretty smart guy, if a bit gloomy by nature.
Grantham’s most recent update on his outlook for growth definitely confirms the latter characterization. The short version: He thinks the days of US growth rates of over 3% are gone. Finito. Kaputt. He writes that “most business people (and the Fed) assume that economic growth will recover to its old rates”, and elaborates further:
Someday, when the debt is repaid and housing is normal and Europe has settled down, most business people seem to expect a recovery back to America’s old 3.4% a year growth trend, or at least something close. They should not hold their breath. A declining growth trend is inevitable and permanent and is caused by some pretty basic forces. The question here is not “Has the growth rate dropped?” (yes, it has) or “Will it continue to drop?” (yes, it will). The question is “At what rate will it drop?”
Grantham’s best guess is that US growth will creep along at 1.4% a year, and he cites a slew of reasons why: Slowing productivity, sluggish population growth, rising energy costs. Sure, those are all headwinds.
It’s worth citing that Grantham has something of a record on spotting economic bubbles and speaking up about them. He didn’t like the cut of the Japanese real estate market’s jib in the late 1980s. He furrowed his brow considerably towards tech stocks in the early 2000s. And he harrumphed about US housing a few years later. They were indeed all speculative flurries that eventually ended, painfully, and Grantham considerably burnished his reputation by predicting as much.
But Grantham spends quite a bit of time building up a straw-man to argue against. It’s not clear on what he bases his claim that most business people and the Fed are hoping for much higher growth. He concedes that his 3.4% figure only holds true until 1980, and the trend has been downward since then. The Fed’s “longer-run” forecast (though it’s not specific about how long-run that is) calls for 2.3%-2.5% growth (pdf). The OECD recently guessed that between 2011 and 2060, US economic growth will hover around 2.1%. That’s a bit higher than Grantham’s, but not exactly a wildly rosy outlook. Such long-term forecasts are pretty unreliable anyway, but to put it in perspective, if Grantham is right, America’s GDP will double in the next 50 years; if the OECD is, it will grow by a factor of 2.8.