US economy transitions to the New Normal

Economic growth


US GDP Apr13.pngThe above chart from the Wall Street Journal highlights the major change that has already taken place in the US economy as it transitions to the New Normal. The black line shows the 10-year average growth for US GDP since 1980, which has halved since 2008 because:

• GDP grew at an average of 3.1% from 1983 – 2007 in the Boomer-led SuperCycle
• Even more importantly, there were only 16 months of downturn during this period
• And these were immediately followed by a recovery based on pent-up demand
• But since 2008, however, growth has only averaged 1%

This change is even more startling given the $tns of stimulus/liquidity provided by the Federal Reserve and the government. They thought this would turbo-charge a quick recovery but failed to recognise that it is demand, not liquidity, that drives economies. 26% of the US population are now >55 years, and 10k/day reach retirement age of 65 years. Older people mainly need only replacement products, and thus the concept of ‘pent-up demand’ is no longer relevant.

Equally, it is very hard for the US economy to grow if China is rebalancing and Europe close to recession. China’s real Q1 GDP growth was probably similar to the 4% growth in electricity consumption and in oil demand. The reported figure of 7.7% is simply a target level for guidance to local governments, as premier Li has emphasised in the past.

The key question for the US is, of course, what happens next? The detail of the Q1 GDP report confirmed that consumers have been busy replacing older cars and appliances, and so future growth in this crucial area will probably now plateau. Worryingly, companies seem to have been over-optimistic on demand, as inventories rose quite sharply. And there were already signs that corporate capital investment is already starting to decline.

Certainly the evidence from chemical markets, and Q1 corporate results, gives little sign that a quick return to SuperCycle years can be expected. Instead, the cost of paying down the debt caused by the stimulus efforts will be a burden for decades to come.

Benchmark price movements since the IeC Downturn Monitor’s April 2011 launch, and latest ICIS pricing comments are below:
Naphtha Europe, black, down 26%. “Asian petchem market is already set to receive over 0.5MT of deep-sea naphtha supply in June
PTA China, down 23%. “Subdued buying activity in the wake of weak China economic data and volatile commodity markets”
Brent crude oil, down 18%
HDPE USA export, down 18%. “Traders saying prices are expected to fall further”
Benzene NWE, up 5%. “Dynamic of the market started to reverse in midweek”
S&P 500 stock market index, purple, up 16%


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