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The striking aspect of the U.S. economys
2015 performance was weaker economic growth
coinciding with a massive advance in nonfinancial
debt. Nominal GDP, the broadest and most reliable
indicator of economic performance, rose $549
billion in 2015 while U.S. nonfinancial debt surged
$1.912 trillion. Accordingly, nonfinancial debt rose
3.5 times faster than GDP last year. This means
that we can expect continued subpar growth for the
U.S. economy.
The ratio of nonfinancial debt-to-GDP rose
to a record year-end level of 248.6%, up from the
previous record set in 2009 of 245.5%, and well
above the average of 167.5% since the series'
origination in 1952 (Chart 1). During the four and
a half decades prior to 2000, it took about $1.70
of debt to generate $1.00 of GDP. Since 2000,
however, when the nonfinancial debt-to-GDP ratio
reached deleterious levels, it has taken on average,
$3.30 of debt to generate $1.00 of GDP. This
Total Nonfinancial Debt as a % of GDP
(Excluding Off Balance Sheet Liabilities)
275%
275%
250%
250%
225%
225%
200%
200%
175%
175%
Avg. 167.5%
150%
150%
125%
125%
100%
100%
Chart 1
80%
80%
70%
70%
60%
60%
Avg. = 51.7
50%
50%
40%
40%
30%
30%
20%
20%
Chart 2
quarterly
billions
billions
$1,700
$1,600
$1,600
$1,500
$1,500
$1,400
$1,400
$1,300
$1,300
$1,200
'10
'11
'12
'13
'14
'15
'16
$1,200
Chart 3
Page 2
40%
40%
quarterly
35%
35%
110%
30%
30%
100%
100%
25%
25%
20%
20%
90%
90%
15%
15%
80%
80%
70%
70%
10%
10%
5%
5%
0%
0%
-5%
-5%
-10%
-10%
-15%
-15%
-20%
-20%
49
56
63
70
77
84
91
98
'05
'12
110%
60%
50%
60%
Avg. = 55.2%
50%
40%
40%
30%
30%
20%
20%
Chart 4
Chart 5
10%
Total Debt
Total debt, which includes nonfinancial
(discussed above), financial and foreign debt,
increased by $1.968 trillion last year. This is $1.4
trillion more than the gain in nominal GDP. The
ratio of total debt-to-GDP closed the year at 370%,
well above the 250-300% level at which academic
studies suggest debt begins to slow economic
activity.
10%
8%
8%
6%
6%
Avg. = 4.7%
4%
4%
2%
2%
0%
0%
-2%
-2%
1999
2002
2005
2008
2011
2014
Sources: Bureau of Economic Analysis, European Central Bank, Bank of Japan, China National Bureau
of Statistics, Haver Analytics, World Bank, U.S.D.A. Through Q4 2015.
Chart 6
12%
12%
10%
10%
8%
8%
Avg. = 7.6%
6%
6%
4%
4%
1999
2004
2009
2014
Sources: Bureau of Economic Analysis, European Central Bank, Bank of Japan, China National Bureau
of Statistics, Haver Analytics. Through Q4 2015.
Chart 7
2.4
2.4
2.2
2.2
2.0
2.0
1.8
Outlook
Our economic view for 2016 remains
unchanged. The composition of last years debt
gain indicates that velocity will decline more
sharply in 2016 than 2015. The modest Fed
tightening is a slight negative for both M2 growth
and velocity. Additionally, velocity appears to have
dropped even faster in the first quarter of 2016 than
in the fourth quarter of 2015. Thus, nominal GDP
growth should slow to a 2.3% - 2.8% range for
the year. The slower pace in nominal GDP would
continue the 2014-15 pattern, when the rate of rise
in nominal GDP decelerated from 3.9% to 3.1%.
Such slow top line growth suggests that spurts in
inflation will simply reduce real GDP growth and
thus be transitory in nature.
Accordingly, the prospects for the Treasury
bond market remain bright for patient investors
who operate with a multi-year investment horizon.
As we have written many times, numerous factors
can cause intermittent increases in yields, but
the domestic and global economic environments
remain too weak for yields to remain elevated.
1.8
U.S.
1.6
1.6
1.4
1.4
1.2
1.2
Euro
1.0
1.0
0.8
0.8
0.6
Japan
0.6
0.4
China
0.4
0.2
Van R. Hoisington
Lacy H. Hunt, Ph.D.
0.2
1998
2001
2004
2007
2010
2013
Sources: Bureau of Economic Analysis, Federal Reserve, European Central Bank, Bank of Japan, China
National Bureau of Statistics, People's Bank of China, Haver Analytics. Through Q4 2015.
2016
Chart 8
Page 5