GDP Growth Will Limp Along for the Next 10 Years, Says Moody’s Economist

The US’s economic growth has been tepid thus far this century as productivity increases have stalled. Barring a miraculous reversal of America’s aging trend or a dazzling tech breakthrough, look for more of the same at least through 2030.

So says John Lonski, chief economist at Moody’s Capital Markets Research, in a research paper, which marks the most downbeat long-term projection out there. Gross domestic product (GDP) expansion has been around 2% annually in the 21^st century. And that’s true even without the malevolent impact of COVID-19, he argued.

Others are more sanguine. For instance, the Organization for Economic Cooperation and Development (OECD) foresees a spring back for the US economy next year, finishing out 2021 by expanding 2.5% to 3.5%.

Lonski isn’t alone in his pessimism, although few have made such far-reaching predictions as his. Former Treasury Secretary Larry Summers, a Harvard economics professor, points to what he calls “secular stagnation” as a long-term bane to US economic growth.

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The average annual rate of labor productivity growth for the 10 years ending in 2019 was just 1.2%. But productivity would have to double that pace to get GDP to move into the mid- to high-single digits it enjoyed in the last half of the 20^th century, Lonski calculated. That “requires another wave of technological innovation comparable to the introduction of internet technology during the late 1990s,” Lonski wrote.

If anything, US productivity growth has slowed even more over the past five years. According to the federal Bureau of Labor Statistics, non-farm business productivity averaged just 1.08%.

Thanks to the surge of the internet, which brought such advances as mobile payments and instant transfers of information, labor productivity rose by a 3% average from 1997 through 2000, Lonski noted. Result: “a 4.5% average annualized surge by US real GDP.”

Back then, he continued, favorable demographic changes helped a lot. During that span, the number of Americans aged 20 to 64 years (i.e., the general working age population) grew by an average 2.25 million annually, while the number of those aged 65 years and older rose by merely 227,000 per year.

After the turn of the century, however, the situation went south. For the decade ending in 2030, demographers estimate average annual increases of merely 241,000 for the 20-to-64 cohort, Lonski said. Meanwhile, there will be an average 1.676 million increase per year for those in the 65 and up crowd.

There are several other explanations for why productivity is lagging. In a paper surveying 23 economists, Focus Economics, a research group, pointed out that corporate capital spending has waned. Some of them said that’s due to short-term thinking that values pretty numbers for this quarter, made nicer due to belt-tightening on productivity enhancements.

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Tags: aging, COVID-19, demographics, Economic Growth, GDP, John Lonski, Larry Summers, Moody’s Capital Markets Research, productivity

Firms must develop diverse leaders for the future, writes CIO Leslie Lenzo and her team at Advocate Aurora Health in response to Tony Waskiewicz's call to action.

As a quantitative exercise, you likely assess your portfolio for factor correlation and unintended concentration. You tell your committees you are looking for uncorrelated alpha. Yet, when you meet with an investment manager, how often do you count the women and people of color on the investment team?

We don’t have to look further than a private equity annual meeting or a mainstream investment conference to see how monochromatic our industry is. The statistics are abysmal, showing that firms with at least 25% ownership by women and/or ethnic minorities control less than 10% of investible assets and, in certain asset classes, a paltry 1% to 2% of total investable assets. However, the lack of diversity runs much deeper than the standard percent ownership perspective. Not only is our industry lacking diversity across firms’ principals, but we’re also missing diversity within the ranks of investment professionals, period. It’s difficult to see how the industry will make progress on the prevalence of firms owned by diverse individuals if we aren’t nurturing diverse talent within today’s investment teams.

In his recent op-ed in this publication, Tony Waskiewicz gave our industry a call to action to stand up against the social injustices that have persisted for far too long. But where do we start? Being that we are investment professionals, we ask, “Where can we get the best return on investment?” In our team’s view, the biggest bang for the buck comes from the large investment firms that annually hire full classes of junior talent and have the resources to train and mentor these budding investors. We need to build the track records of diverse investment professionals today, so these individuals are armed with the experience necessary to be the leaders of our industry tomorrow.

Organizations that hire a significant number of junior investment roles sit in an enviable seat where they have the opportunity and resources to effectuate long-term, meaningful change. The apprenticeship model needs to start early and not only focus on entry level positions post-graduation, but also on internships spanning all years of students’ college careers and even on generating awareness of the investment industry as a potential career choice for high school students. Upon identifying diverse talent, organizations need to invest in training and mentoring the next wave of industry leaders.

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For investment firms to truly effectuate change within their ranks, diversity must become part of the company culture. While it is critical that diversity becomes a priority with boards and the C-suite across investment firms, that mindset also needs to trickle down to hiring managers across all levels of the organization. Being an ally involves actively searching for diverse talent. Continuing to tap the same sourcing networks, Ivy League university career centers, and offspring of company executives shows a lack of creativity and unique sourcing skills. Populating the investment ranks with diversity takes the same kind of shoe leather we expect from our managers to source unique investment ideas. We need to ask our managers what they are doing to source unique talent, much as we would ask how they source proprietary deals.

Congratulations! Your firm has started to hire more diverse incoming analysts. Now what? It’s not time to pat yourself on the back and consider the job done. You have to ensure you have a culture that embraces all lifestyles, religions, and backgrounds so that you can retain your diverse talent. It’s quite likely that the legacy social structures will need to evolve to accommodate different interests and social experiences. Converting diverse hiring practices into diverse leadership is an intentional act.

It may seem quite easy for limited partners (LPs) to tell managers what to do. But let’s turn the mirror on ourselves. Yes, our teams tend to be much smaller than those of the large investment houses, but we do hire at times. We need to roll up our sleeves and proactively seek out diverse talent for our summer internships and analyst roles, too. Allocators can speak up on the topic of diversity and be vocal with our existing majority investment managers. We expect them to do more. For example, we have chosen to actively survey our managers and annually request data on firm ownership and investment team composition. And we let them know that we expect to see improvement on these metrics as the years progress.

We are long-term investors, and our suggestions above reflect the long game. By dramatically widening the top of the talent funnel today and building those track records over the course of many years, we are setting the groundwork for a much-needed change in the face of portfolio managers and principal investors for the next 10, 20, 50 years. The social injustices that we are grappling with are systemic in nature and date back to the founding of this country. These issues are not quickly resolved, but by taking thoughtful steps to make real, sustainable progress, we can change the face of industry for generations to come.

By Ben Bartelt, vice president, Marketable Investments; Laura Hill, vice president, Alternative Investments; and Leslie Lenzo, chief investment officer, Advocate Aurora Health

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.

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Tags: Advocate Aurora Health, company, cultural diversity, Diversity, Management, opinion, organization, Workforce