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Economic Growth

NOMINAL GROSS domestic product grew 4.1% in 2019 and real GDP—meaning growth above the inflation rate—was 2.3%, versus a real rate of 2.9% in 2018.

For comparison, over the 50 years through year-end 2019, real GDP grew 2.7% a year, according to data from the U.S. Department of Commerce’s Bureau of Economic Analysis. That means 2019 was a below-average year.

Indeed, it’s been a disappointing past two decades. Between 1997 and 2000, we had four consecutive years with real GDP growth above 4%. Since then, we’ve had only two years—2004 and 2005—when growth reached 3%. Real GDP growth was dragged down by the Great Recession, with the economy shrinking 0.1% in 2008 and another 2.5% in 2009 (and, thanks to the coronavirus, it appears 2020 could be another year of economic contraction). But even before the Great Recession, economic growth was tepid. Real GDP has grown 2% a year in the 19 years since year-end 2000, compared with a 3.4% annualized rate for the 10 years prior to that.

A big question: Are there structural impediments that are restraining economic growth, and do those impediments mean we won’t regularly notch the 50-year average of 2.7% a year?

Some experts have argued that income inequality is crimping economic growth. Low-income earners tend to save less of their income and spend more, so sluggish wage growth could mean slow economic growth. Others wonder whether the economy is being hurt by the aging population and the workforce’s slower growth.

All this should concern stock investors. The reason: Slow economic growth would mean slower growth in corporate profits—and that would be bad news for share prices.

Next: What Drives Growth

Previous: Inflation

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