One of the stories driving conversation today in financial markets, especially among fixed-income participants, is the idea that U.S. growth has peaked and that is why bond yields have declined recently.
We see the 10-year yield finishing the year at or near 1.9%.
This is a discussion in need of some context that considers the long-run sustainable pace of growth in the United States and how long it will be before the economy returns to trend.
First, it is likely that the U.S. growth rate will peak in the current quarter of 2021. While I have gross domestic product growing at 6.2% for the first quarter and 10.7% in the second before decelerating to 8.3% in third quarter and 5.8% in the fourth, that growth rate is well above the long-run sustainable pace of growth near 1.8% in the U.S.
Second, on an annual basis, we expect growth to advance 7.5% this year, 4.8% next year and 2.9% in 2023. We do not expect the economy to return toward trend for at least the next three years.
Our friend Steve Liesman runs a Rapid Update at CNBC (full disclosure: we contribute) that has a similar result: First quarter at 6.8%, second at 10.2%, third at 7.6% and fourth at 5.1%. CNBC Rapid Update participants expect a 2021 expansion of 7%, followed by 4.1% next year and 2.3% in 2023.
Our former colleagues at Bloomberg have a similar result in their consensus forecast: 6.2% this year, 4% next year and 2.4% in 2023. The idea of peak growth has to be put in the context of what is going to be the best period of growth since the 1980s.
Third, we have not yet been able to capture properly what a global recovery will look like in 2022 or 2023. What will North American and global growth look like once those economies completely reopen as mass vaccinations are put in place? From my vantage point, a global vaccination regime presents the risk of a longer pace of above-trend growth in the U.S., not a shorter period. For now, we will almost surely experience a two-speed global recovery that, once it shifts into a higher gear, will look a lot like a rising tide that lifts all boats.
The economic forecasting community expects a period of growth that is well above trend over the next three to four years. Of course, this does not include any productivity-enhancing policies like a multi-trillion-dollar, multi-decade infrastructure project that would boost productivity and presumably push the long-term growth trend back above 2%. This is just one reason why the discussion of peak growth feels so lacking today.
About those yields
So what does it mean for long-term yields? They are going up. But they are going to do so within the context of Federal Reserve policy, which will not move to taper its asset purchases at its next meeting nor lift the policy rate for many months, if not years.
In our estimation, the recent reversal of the 10-year yield from a peak of 1.74% on March 31 to its current 1.58% is a function of too many investors buying into an argument about near-term inflation risks or the return of 1970s-style inflation that is likely not in the cards. There are also technical reasons such as Japanese capital flows into the U.S. in search of yield following the end of the fiscal year in Tokyo.
The takeaway
We are quite comfortable with our call that the 10-year yield will finish the year at or near 1.9%. Everyone needs to relax and enjoy this. These eras do not come around that often. The resilient American economy is going to accelerate amid a historic reopening as it reimagines its foundations.
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