Dying Growth

Pfäffikon SZ, Switzerland – You will have noticed that the American President Trump is tapping against many buckets as he walks through the street. The White House’s grace has been lost and has made way for cheap squabbles on Twitter. The American citizen wants Trump to handle countries and continents –economically– in favor of the US. However, it is not that simple: a Japanese scenario is obvious.

Job figure
Anyone who studies the most recent American job numbers thoroughly will quickly conclude that these are not great. At first glance, the figures look okay because the unemployment rate in the US fell from 4.1% to 3.9% in April. However, we are more or less at the end of the economic cycle where a higher wage would be self-evident. Scarcity would have to drive up the price of salary; which, incidentally, is terrible for shares in general. Additionally, the Fed anticipates inflation and slowly increases interest rates. It may be that the Fed is expecting inflation that never comes.

Wage growth
The problem is that wage growth in the US was only 1.5% in March. At the end of last year, the pick-up in wage growth in the US caused fear to investors. This fear seems unfounded, especially when we make a comparison with Japan. In Japan, unemployment is also low (2.5%), but wage growth is even worse than in the US, namely 1%. It should be noted that the demographic composition in Japan is even worse than in the US. It is also worth noting that more women have a job in Japan, but this group does receive a lower wage.

Wages and salaries account for roughly half of the average personal income in the US. Other sources of income are tax, interest, or dividend driven. The growth of 1.5% over half of a revenue stream is disappointing, partly given the traditionally low savings rate of the average American. The trend of aging in the US is not as alarming as in Japan but is moving very slowly in that direction. Trump can promise what he wants, but he can not coop with this demographic trend. “America First” can hopelessly fail for this reason alone.

Investors are advised not to become too exuberant about US growth figures. It is likely that the American cycle will become much like the Japanese cycle in the coming decades. Governments and central banks have no answer to this and are powerless. Growth dies slowly and will remain low. However, a recession remains –strangely enough– out. Typically Japanese conditions in the US, therefore, seem inevitable.

It remains for me to wish you a good trading week.

Jan Dwarshuis is CIO at Thirteen Asset Management AG. Dwarshuis writes his columns in a personal capacity. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in above mentioned shares and has no intention of doing so in the next 72 hours.