Growth Spike

Art by Stephen Leonardi

Art by Stephen Leonardi

Gary Matthews, PhD CPA/PFS AIF

SRI investors endeavor to invest in the best parts of the economy, that part of the economy that supports more people, more often, and more fairly, while damaging the environment less. Inevitably, though, their investment results are not that different from broader markets that reflect the overall economy.

Recent reports about the U.S. economy sounded some really high notes.  In the second three months of the year, the U.S. economy grew at an estimated 4.1%—better than the 2.2% growth posted during 2018’s first quarter.  The 4.1% figure is subject to revision as economists refine the numbers, but a 4% growth rate, if sustained through a period of years, would greatly bolster the wealth of all Americans.

Not surprisingly, the current Administration would like to take credit for this. Thoughtful people know better.  For one thing, there is nothing remarkable about a single quarter’s 4.1% GDP increase.  Over the longer term, short term growth spikes like this are relatively ordinary.  More to the point, the U.S. economy just entered its tenth consecutive year of growth, growth that began during the Obama presidency. The economy exceeded last quarter’s level four times during the Obama years, in 2009, 2011 and twice in 2014.

These growth spikes typically don’t last very long either.  One economist described the second quarter as an economy on a “sugar high.”  If you have ever had small children, you know how those often end.  Other economists have noted that this spike in economic activity is the result of a number of one-off events.  You will remember that Congress passed a significant corporate tax cut last year, adding some short-term euphoric fuel to the much longer-running U.S. economic growth engine.  In addition, the quarter was aided (predictably) by foreign companies stockpiling U.S. goods before the threatened tariffs disrupt the flow of products across borders—temporarily boosting U.S. exports.

Long-term, the GDP of any country is determined by the growth in the number of workers and the rising productivity of those workers as they labor at their desks and on the factory floor.  Neither of those factors are growing at anywhere near a 4% rate currently, which suggests that next quarter will see a return to the average 2-2.5% rate that we’ve experienced since 2009.  That, in turn, may explain why the U.S. stock indices actually fell on the day of the “historic” GDP announcement.  All savvy investors know better than to project one quarter’s results forward indefinitely into the future.  SRI investors, in particular, invest for long-term sustainability, and that can only be good for jobs and productivity.

Loosely adapted from a Bob Veres draft, with permission.