From Where Will a U.S. Recovery Emerge?
April 16, 2009
From Wall Street to Main Street to residential areas, people everywhere are trying to talk themselves into believing that better economic times lie not far ahead. Some time ago, many analysts earmarked the third quarter of 2009 as a probable onset for economic recovery. That period at first was far in the future but is now just a short 2-1/2 months away. The recession will soon be the longest postwar downturn. Nothing lasts forever, and the collective cry of “enough already” is getting louder. The big banks have had some good news to report, thanks in part to relaxed accounting standards. Administration and Fed officials have encouraged a mood of guarded optimism, and the stock market’s gains since early March reflect the spring season. But how realistic is this? The adage says seeing is believing, not believing is seeing. And the analytical side of the brain wonders that if a recovery is fast approaching, it must have a source among the usual suspects of personal consumption, housing, exports, inventory building, or government spending. None of these seem very promising.
Residential investment was free-falling in the fourth quarter, plunging 22.8% at a seasonally adjusted annual rate (saar) and by 19.4% from 4Q07 and by 34.7% from 4Q06. Housing starts last month were 8.6% lower than in December and down 48.4% from a year before. Permits show an on-year drop of 45%. Many banks reportedly plan to pursue foreclosures more aggressively, an ominous sign that housing may in fact be poised for a steeper slide over coming months.
Job insecurity is a consumption killer. New jobless claims averaged 640K over the past twelve reported weeks, and continuing jobless claims increased over the last seven weeks at the astonishing weekly pace of 135K. Unemployment will probably reach 9.0% in April versus 8.5% in March, 7.2% at end-2008, 5.6% at mid-2008 and 4.9% in December 2007 when the recession began. Retail sales fell 1.1% last month instead of firming 0.3% as projected.
China has emerged as the great hope for the world economy but represented just 6% of world GDP as recently as 2007. China is not large enough to power a single-engine world economy, and it’s delusional to expect China to return to previous growth of 11.0% per annum during the five years to 2007 or even 9.0% in 2008. India is only about a third as big as China, and other regional economies like eastern and western Europe, Japan, Latin America and much of the rest of emerging Asia remain in deep slumps. The stronger dollar since mid-2008 is likely to mitigate the acceleration of U.S. exports that develops eventually.
Government spending is already buoying the U.S. economy with growth of 1.3% saar in 4Q08 and 3.2% between the final quarters of 2007 and 2008. Announced fiscal stimulus in 2009 amounts to about 2% of GDP and will be no bigger than that in 2010. The hard-debated $787 billion package neither seems adequately large nor optimally structured to deliver the greatest lift. With the groundswell of deficit-to-inflation phobia, subsequent fiscal support will be very hard to ram through the Congress.
Business investment responds to strengthening export and consumer demand and rising capacity usage, none of which seem to be happening sufficiently. Non-residential capital spending plunged 21.7% saar in 4Q08 and by 5.2% from the final quarter of 2007. Weak corporate earnings, which fell 16.5% saar and by 21.5% on year, also argue again any early rebirth of capital expenditures.
Minimal U.S. destocking occurred in 4Q08. Much more has been seen this year and will be reflected heavily in first-quarter national income statistics. From a hugely negative factor in 1H09, this holds the most promise for improvement in the second half of the year. Unlike most other postwar recessions, however, misaligned inventories did not feature prominently in causing or powering the present one. It will take more than an inventory correction to create a basis for ending the downturn.
For a sustaining economic recovery, the United States will have to avert fresh banking system problems. That’s a huge and very iffy proposition because financial institutions have been allowed to conceal the true extent of their bad assets. If results from bank stress tests do not lead to at least some sacrificial lambs being acquired by the public sector, a credibility gap will linger over the whole industry, putting the U.S. economy at risk to follow the kind of in-and-out-of-recession path that occurred in Japan during the 1990’s. Beyond this lies the equally, if not more, daunting task of reining in the loose fiscal and monetary policies. Implement such too slowly, and higher inflation and long-term interest rates may result. Do it too quickly, and the recovery could unravel. Fed officials have said they understand that rates must be raised more quickly than in 2004-6. Will they dare to move in increments of 50 basis points or more and to engineer a three-percentage point rate hike within six months, reversing the 5.25% to 2.25% decline in the six months to March 18, 2008? Such seems unlikely. The Obama’s fiscal message is a call for trust that the deficit will be halved by the next presidential election, but neither how such will be accomplished nor from what peak level has been clarified.
Everyone hopes the recovery optimists prove right. If the sprouts of confidence are not genuine, an aborted stock market rally is apt to be the proverbial canary in the cave, with a new bear leg alerting all to the truth before hard data signal new problems.
Copyright 2009 Larry Greenberg. All rights reserved. No secondary distribution without express permission.
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