Slower Growth Ahead for U.S. Economy

Jeremy Glaser: From Morningstar, I'm Jeremy Glaser. Our director of economic analysis, Bob Johnson, sees signs of the economy slowing. We're here to talk about some of the things that he's worried about.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So we've been doing these videos for a number of years and often one of the first comments is that you have rose-colored glasses on, when you are looking at the economy, you are usually kind of the eternal optimist. But recently you've seen some signs that are distressing you about the state of the economy. Why has your view really switched over these last couple of weeks and months now?

Johnson: Sure. I think a lot of the key drivers of this recovery that we started talking about in 2010--the shale oil, the auto industry, Boeing airliner production and more recently healthcare--as being key drivers of economy activity, all kind of small by themselves, but you roll them together they were that little extra element that helped the economy. And now all of those appear to be seeing signs of weakness.

Glaser: So let's look at those factors and what's holding them back now. With autos is it just that everybody who needed a new car, now has one? What's happening there?

Johnson: Largely I think that’s it. I mean, I think we've seen a situation where auto sales peaked out at something very close to 17 million units a year, fell nearly in half at the depths of the recession. And then we spent the last six years or so getting back to that kind of old 17 million number and I think we've kind of plateaued there. I think that the prognosis for future growth there is limited to roughly population growth and that’s been a key sector of the economy adding maybe a couple of tenths on average each year. And again in the world of 2% to 2.5% growth, that's a big deal.

Glaser: Then aircraft, what's happening with Boeing?

Johnson: I think that we saw some huge ramp-ups about Boeing and we talked about that in 2010 about their production schedule. And they have largely with some delays around some battery fires, but nevertheless dramatically ramped up production. At one time civilian aircraft at their peak in 2012 were growing about 30% a year in one quarter. That number slowed to about 10% in 2015, and now in the first few quarters of this year civilian aircraft contribution has actually been negative. So clearly a key growth factor has slowed, and we've heard about the 747 production line may get shut down. We've now even heard talk of slowing of the 777 line. So clearly that's slowing up a little bit too. And that was a key element.

Glaser: Then the rise and fall of shale. Obviously a pretty well-known story. But do you see any signs that we could bounce off the bottom when it comes to shale production?

Johnson: Well I think there is a lot of things going on there. There were so many things that helped over time, and it was such a slow build that nobody kind of noticed and then all of a sudden fall off a cliff all at once and then everybody noticed. I mean just little things like quarries that produce sand that went into the shale process were big companies that suddenly made a difference. Now all of that's turned the other way. Oil wells structures has really ruined the business investment numbers. Even Yellen mentioned in her press conference that we need to be little careful with business investment, because a lot of it is because of that investment in structures namely oil wells. So we've seen that slow down as well as the actual production not so much. Its lot of the basic equipment that you use in the oil industry that's really slowed. The good news there is that it can't get much worse. I mean the whole thing could disappear and it wouldn't make any difference to GDP, it's gotten so low and fallen kind of 50% so many quarters in a row, that there is hardly anything left. That's a good news-bad news it can't hurt as much anymore, but it also if it doubled it won't help us.

Glaser: Then we talk a lot about healthcare spending particularly how it pertains to the budget. But when we think about GDP the slowdown there is not a positive.

Johnson: No, absolutely not. And it's been a big help to the economy and it's been a big source of, one of the bigger sources of employment growth every month when we talk about it. So it's been good news. Healthcare overall added about 0.6 % to GDP in 2015. So again out of 2.6% number that's a big number. So healthcare has been important, and frankly healthcare kind of accelerated dramatically after the Affordable Care Act went into place. What's happened is that a lot of people were now included in the Medicaid program, that weren't previously included and we've seen a huge gain in enrollments that really helped the healthcare numbers in 2014 and 2015. But now those enrollments are hardly growing at all. Now everybody that was eligible most of them have signed up, most of them been through that trial period of, let's see the doctor make an appointment, and the spending has largely occurred, and we suspect that healthcare spending will not grow as fast in the back half of this year and even going forward, now that those set of eligible people are fully involved.

Glaser: Then on top of all of this you can layer in an aging populations, demographic issues and you think that isn't doing any help here either.

Johnson: No, absolutely, I mean if you have got a population that’s only growing 0.5 %, 0.7%--some of that coming from immigration, which some folks want to limit--clearly you are not going to have a very good growth in the economy. You can't expect 3% growth economy on a population growth that's only up half a percent, 0.7%--it just can't happen.

Glaser: We don't know what the next big business investment trend could be. Could we see a change in consumer habits where people are spending more or there is more distribution due to higher minimum wages to lower wage workers who have a higher propensity to spend? Could that be something that could make up the difference?

Johnson: Absolutely. I mean that could be one of the things that surprises us. If we actually get all of this where the lower wage worker and workers in general get more of the economic pie--and they spend more of their money as you mentioned-that could be one of the areas where we are wrong. And certainly we have been optimistic that higher wages resulting from demographics could help the overall consumption numbers. But on the other hand we've become a little less comfortable with that theory lately as those higher wages are passed on as higher cost, which just means we kind of rotate around who gets the money rather than driving the overall economy higher.

Glaser: So what does this mean altogether? If you are an investor thinking about corporate profit growth. Are we looking at potential recession in front of us? Are we looking at just more of this very, very low growth for a long time? What's the best way to think about these trends coming together?

Johnson: I think it means substantially lower growth, and I think that people have to adapt to that concept. And we've watched the Fed so slowly come down--I mean these demographic trends were kind of there to see 10 years ago. But it's just recently that everybody, its really kind of sunk in to what that means especially given the lower productivity growth that we've seen. So we're all very concerned about that, and I think that we've always said that 2% to 2.5% is our base forecast for any given year. I think that number's got to move down to 1.5% to 2% not just for this year as we kind of originally stated by maybe even over the longer term.

Glaser: So get ready for slow growth.

Johnson: Slow growth and probably because of higher wages it might even be more problematic for corporations and corporate earnings.

Glaser: Bob, thanks for bringing that together for us today.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.