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shown in Exhibit 6. This improvement in net worth will enable households to lower their savings rates going forward and support consumption. Therefore, even if the “hangover” hypothesis was partly valid earlier in the recovery, it should have less impact in the future. During the current recovery, the financial sector also deleveraged substantially, partly due to the unusually high levels of leverage that existed as the crisis began and partly due to greater financial regulation resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act signed into federal law by President Barack Obama on July 21, 2010. As shown in Exhibit 7, the financial sector began to deleverage even before Dodd-Frank and has continued to do so through 2016. However, more recently, the pace of deleveraging has abated, as shown in Exhibits 4 and 7. Furthermore, such deleveraging may well be bottoming and soon reverse as households and the financial sector face a more favorable fiscal and regulatory policy environment under President-elect Trump. For all practical purposes, the “hangover” may now be over. Secular Stagnation: Unfavorable Demographics As we discussed in our 2016 Outlook: The Last Innings, the term “secular stagnation” was first coined by economist and Harvard professor Alvin Hansen in 1934 and fully described in his presidential address to the American Economic Association in 1938." He predicted that poor demographics, limited innovation and few trading and investment opportunities would slow US growth. The term was more recently popularized by Lawrence Summers, professor at Harvard University and former secretary of the Treasury, when he referred to secular stagnation in a 2013 speech at the International Monetary Fund. Hansen’s dire predictions never came to pass, and the US experienced close to record levels of productivity growth in the post-WWII period up to 1973, along with strong growth in the labor force. This current cycle, in contrast to the decades immediately following Hansen’s predictions, has been hampered by weak demographics and a decline in the growth rate of the labor force. In a September 2016 study, aptly called “How Should We Think About This Recovery?,” Jay Shambaugh, a member of the Council of Economic Advisers, shows that when one compares this recovery Exhibit 7: Change in US Financial Sector Leverage Following Recessions A decrease in financial sector indebtedness has contributed to a slower-than-usual recovery. Change in Debt-to-GDP (Percentage Points) 305 --«---+- Previous Post-W WII Recoveries (Median) Current Recovery 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 Quarters After Recession End Data through 03 2016. Source: Investment Strategy Group, National Bureau of Economic Research, Federal Reserve Economic Data. with the average of past recoveries, the growth gap narrows significantly if one accounts for the number of people in the labor force.'* Instead of this recovery growing at about half the pace of the average of past recoveries, the gap narrows to 83% of the average: GDP per number of people in the labor force has grown at an annualized rate of 1.9%, compared with an average of 2.3% in past recoveries. A recovery that appears to be at half the pace of other recoveries is actually in line with other recoveries after adjusting for the size of the labor force, as shown by comparing the red lines in Exhibits 8 and 9. There are two components to the unfavorable demographics story. The first is simply the decline in the growth rate of the US working-age population, which is driven by aging, the retirement of the baby boom generation and slower immigration. This trend cannot be easily reversed; however, the pace of decline can potentially be slowed. For example, the commonly accepted retirement age of 65 can be extended. In fact, there is some evidence that baby boomers are working longer than historical norms.!’ When life expectancy was about 62 years in 1935, the retirement age for Social Security was 65. Today, life expectancy in the US is about 79 years, and the retirement age for Social Security has been extended to 67 for those born in 1960 or later. Of course, more broadly, the retirement age is still regarded as 65. A 65-year- 10 | Goldman Sachs | JANUARY 2017 HOUSE_OVERSIGHT_014543