It is important to remember that we live in a nominal world. It is easy to forget that as the talk in economic circles focus on the “real” metrics, after adjusting for inflation. Like most things in the world, inflation has gone through its cycles over time. Taking the approach of adjusting for inflation in economic statistics enables a more straightforward comparison of current readings to economic history, but it also obfuscates an important point. In our daily activities across the world, we act nominally. As employees, we get paid in nominal dollars. As consumers, we buy goods or services in nominal dollars. As producers, we source our inputs and sell our goods in nominal dollars. Therefore, the corporate fundamentals of revenue and earnings we look at as investors are in nominal dollars. In setting expectations for what revenue or earnings growth may be going forward, looking at the nominal level of economic activity may be instructive. In the chart below, we show the year-over-year change in percentage terms of US economic activity (GDP) since 1980. What jumps out is that, excluding the Great Recession of 2008, nominal GDP growth in the US is bouncing around the lowest levels seen in 35 years. These are levels typically associated with recessions –a technically defined term that implies two consecutive quarters of negative growth on a “real” basis. No wonder news headlines talk about the feeling of recession by despite many economist projections for GDP to be in solidly positive territory.
Debt is also a nominal concept. This is a critical point today when certain borrowers, especially governments, have far more debt outstanding. Not unlike a corporate revenue, tax revenue to a government is a nominal concept. Falling levels of nominal economic activity implies a falling level of tax revenue collected, all else being equal. The issue becomes an acute problem in a country like the US where government debt outstanding roughly equals GDP when nominal GDP growth falls below nominal interest rates. It is difficult to de-lever if interest cost is growing faster than revenue!