US GDP flop is a sign of secular stagnation, says Deutsche Bank

Bloomberg

You can now add the rates strategy team at Deutsche Bank AG to the growing list of Wall Street analysts who reckon the U.S. economy is probably ensnared in secular stagnation.
In a research note published on Friday, Deutsche Bank strategists, led by Dominic Konstam, say the Federal Reserve risks a “big policy error” if it hikes interest rates in September as the latest GDP numbers mark an imminent labor market-driven slowdown for the U.S. economy.
The world’s largest economy expanded by just 1.2 percent in the second quarter while first-quarter expansion was revised down to 0.8 percent from an initial 1.1 percent estimate. The second-quarter rate of expansion was less than half the advance forecast by economists in a Bloomberg survey.
“If the economy can only muster growth in the vicinity of 1 percent when the labor market is at full employment, one must take the secular stagnation thesis more seriously,” the Deutsche Bank analysts write. “In other words, perhaps the 2.1 percent average growth rate of the present cycle has been an over-performance. If productivity continues to underwhelm, we will likely see downward revisions to potential growth, telling us after the fact that we have been closing the output gap faster than we thought.”
Secular stagnation is the contentious view that economic growth and the natural rate of interest for the US economy is structurally low or in negative territory, and promoting full employment — in the absence of sustainable final demand — risks financial stability. The Deutsche strategists paint a negative picture on US productivity prospects, noting that the “non-consumer portion of the economy is shrinking not only in real terms but also in nominal terms.” With real GDP growing at just 1.2 percent over the last four quarters, the strategists reckon a labor market slowdown — in which low productivity forces firms to defend profit margins by firing workers, who are also consumers — is nigh. This would depress aggregate demand, and further constrain margins for businesses, the analysts write.
The odds of a September rate hike, according to federal funds futures contracts, have dropped to 18 percent compared with 28 percent before the second-quarter read. A traditional driver for U.S. monetary tightening economy — as the labor market tightens, wage inflation should eventually increase, as per the Phillips curve — is now rendered less likely given second-quarter data, Deutsche strategists write, forecasting no rate hikes this year.
Signs of healthy consumer spending continue to feed confidence among Fed officials about the underlying strength of the U.S. economy. On Thursday, Federal Reserve Bank of San Francisco President John Williams said two interest-rate increases this year could be warranted, despite the lower-than-expected GDP number for the second-quarter.