OREANDA-NEWS. The popular "secular stagnation" narrative paints too pessimistic a picture of US medium term growth prospects, according to a new report from Fitch Ratings.

"The secular stagnation framework pays insufficient attention to important cyclical adjustment processes that have affected US economic performance over the last five or six years but are very unlikely to have the same impact over the next five years," said Brian Coulton, Chief Global Economist, Fitch Ratings.

On the supply side of the stagnation debate, both labour force participation rates and labour productivity growth have been affected by cyclical adjustments that should unwind over the remainder of the decade. While a big part of the decline in US labour force participation rate since 2009 reflects demographic factors - namely the steady rise in the share of workers over 55 - there has also been a large residual component, unrelated to population ageing. Age-adjusted participation rates show a clear cyclical pattern since the early 1980s and suggest a strong 'discouraged' worker effect in the early part of this decade. A modest pick-up in age-adjusted participation will limit the ongoing drag from demographics on labour supply over the next few years.

Labour productivity growth has been weak but this partly reflected the fall in investment rates after 2009, which have resulted in a sharp fall in the growth of the capital stock. The capital stock per worker has been falling since 2012, which is highly unusual. High unemployment and low real wage growth meant that companies responded to demand expansion from 2012 by hiring additional workers rather than expanding the capital stock. This aspect of labour productivity weakness does not reflect deteriorating efficiency in the economy. Wider measures of productivity growth (taking into account both labour and capital inputs) have deteriorated, but not dramatically.

"With underutilised labour becoming more scarce and investment rates having risen more recently, capital stock per worker should start rising again, helping labour productivity performance," said Mr. Coulton.

The demand side of the secular stagnation narrative emphasises insufficient aggregate demand. However, it is important to note that private sector deleveraging has been a major constraint on corporate and household spending in the last five years, as reflected in record private sector financial surpluses (i.e. the excess of savings over investment). These forces are unlikely to be as powerful over the next few years. Higher household savings and the collapse in residential investment after 2009 helped to deliver a very sharp decline in household debt ratios.

"The resilience of private consumption and robust residential investment growth over the last year or so suggests that balance sheet concerns are no longer constraining household spending to the same extent," said Mr. Coulton.

Corporate sector excess savings have been running at unprecedented levels over the last five years, driven by the weakness in business investment and a highly elevated savings (profit) rate. Corporates have utilised these cash flow surpluses to return cash to equity holders and build up cash buffers rather than paying down gross debt. Nevertheless, the corporate debt-to-profit ratio has fallen. Moreover, corporate sector excess saving is now starting to fall back - Fitch estimates non-financial corporate financial surplus was just 0.6% of GDP in 2015, the lowest since 2008.
Secular stagnation theories of US growth are often used to justify the sustainability of current low long-term real interest rates; however, Fitch suggests some caution about this conclusion.