Monday, September 13, 2010

Different Opinions on US Growth

From today's WSJ:

The global recovery is still on track, but it's looking increasingly likely to be a long slog for much of the developed world.

Just over a year after the recovery started, its initial vigor has abruptly subsided, thrusting the world into a new period of uncertainty. Hopes of a U.S.-led recovery have faded as American consumers retrench. Bursts of growth in Japan and Germany are waning or expected to do so. China and other big developing nations are still growing strongly, but at a slower rate than they were not long ago.

"We were waiting for the second stage of the rocket, and it just fizzled out," says Ethan Harris, head of developed economics research at Bank of America Merrill Lynch in New York.


Here are three scenarios for the global economy over the coming year:

Feeble Growth

In recent weeks, data from around the world reveal a growth downshift. Companies that had been rushing to restock their inventories are now ordering only what they need to meet existing demand, affecting the entire global supply chain.


Bruce Kasman, chief economist at J.P. Morgan Chase, now expects the world economy to grow at an annualized, inflation-adjusted rate of 2.5% in the second half and 3.0% next year, down from his April estimates of 3.5% and 3.4%. That growth, he says, would come mainly from emerging markets, which would grow at a rate of almost 6% in 2011, while the developed world would chug along at 2%—not enough to make a meaningful dent in unemployment.

The subpar growth could last much longer in countries such as the U.S. and U.K., where consumers are struggling to pare debts.

Double Dip

Adverse events in finance or politics could turn anemic growth into renewed recession.


A prime candidate is the return of the euro zone's public-debt crisis. Recent jumps in Irish, Greek and Portuguese bond yields suggest investors aren't convinced the crisis is over, despite European governments' creation of a €750 billion ($953 billion) bailout fund for struggling euro members.

In a worst-case scenario, renewed turmoil in government bonds could undermine confidence in banks and refocus investors' concerns on financial strains facing other countries, including the U.S. and Japan.

An Upside Surprise

Economists see an upside surprise as the least likely scenario. There are two main ways a renewed growth surge could happen: one led by the U.S., another more desirable one led by the rest of the world.

The U.S. has ample resources to restimulate the global recovery. U.S. companies are sitting on some $1.8 trillion in cash—the highest level, as a share of their total assets, since 1963. If and when uncertainties over income taxes, health care and government policy clear up, companies could grow confident enough to deploy that cash to hire workers and invest in new projects. That, in turn, could inspire U.S. consumers to return to the malls.

"The amount of cash that corporate America has is astonishing," says Jim O'Neill, head of global economics research at Goldman Sachs in London. "If they put that to work, then off we go."

A recovery led by U.S. consumer spending, though, likely would widen the U.S. trade deficit and, thus, increase U.S. borrowing from abroad—an imbalance many economists believe contributed to the global financial crisis. Even with U.S. consumers in the doldrums, the trade deficit grew at an annualized rate of 27% in the three months ending July.

Paradoxically, a weak U.S. could actually benefit the world economy. As the Federal Reserve holds U.S. interest rates low to support growth, it puts pressure on central bankers around the world to do the same. This is particularly true in developing economies that try to maintain a constant exchange rate to the dollar.

Let's look at the scenarios

1.) Slow growth is by far the most likely. The US gets 70% of its growth from consumer spending. Currently, the US consumer is allocating resources between spending and paying down debt. As such, consumer spending has been growing at a quarter to quarter growth rate of about 2%. We've seen some contributions from other areas of the economy such as inventory restocking, exports growth and some capital investment. There is little reason to think this current situation will change in the near future.

2.) Notice that a double dip recession would be caused by an outside, unexpected event, not a maintenance of the current economic path. Also note that as Mr. Roach says shocks do happen all the time, but no, they usually no not lead to imminent collapse even in weak economies. For example, the US just had a horrendous oil spill that probably hurt growth in the second quarter. Yet the US economy is still growing. In addition, we just had a shock in the world grain markets from a spike in wheat prices that the economy absorbed fairly well. Finally, I don't think the data supports a double-dip conclusion, especially after looking that the recent Beige Book in detail (which I started last week and will finish later this week).

3.) Why would businesses invest right now? There is a a boatload of excess capacity in both capital and human resource assets. There is no reason to open their wallets. And consumers are still paying down debt; they are not going to increase their spending beyond their current pace.