Monday :: Aug 9, 2004

The Mythical Recovery

by soccerdad

Stephen Roach at Morgan Stanley doesn't think much of the present recovery.

The renewed weakness in the economy is no surprise to him since he doesn't feel this is a good or typical recovery. Given the amount of fiscal and monetary stimulus applied to the economy the recovery is rather small and costly. Its costly because it has been accompanied with massive deficits, massive household debt, little domestic savings, and an asset-dependent support to aggregate demand. He makse the point that since monetary and fiscal policy has maxxed out, it doesn't take much to damage a small and vulnerable recovery. Theproblem is oil prices.

In my view, recent data unmask five key myths to the case for sustainable economic recovery in the US and in the broader global economy:

Myth 1: The US economy has achieved the critical mass of a self-sustaining cyclical recovery.
By our calculations, private nonfarm payrolls are currently 8.1 million workers below the path of the typical hiring-led recovery.
No jobs=no salary=no purchasing

Myth #2: Imbalances donít matter

Imbalances: Current account deficit = 5%, Federal budget deficit = 4% and national savings rate under 2% of GDP. Meanwhile household indebteness exceeds 85% of GDP.

The idea that they don't matter is based on the idea that foreign investors are perfectly willing to foot the bill for the US living beyond its means. He claims that these imbalances are indeed bad. The obvious problem is the assumption that foreign investors will continue just like in the past. If they don't with no savings

Myth #3: Oil doesnít matter. .....Each of the five recessions since the early 1970s has been preceded by an oil shock in one form or another. The key question, in this instance, is whether the US has experienced a true oil shock.

He claims that $50/barrel would be a real problem and clearly a shock. However, since the US economy has so little cushion the $44/barrel we're seeing now could have significant, if not disasterous, results.

Myth #4: Nothing stops the American consumer.

....debt is a key concern. Even with interest rates near 40-year lows, debt service burdens -- interest expenses relative to disposable personal income -- are near historical highs. The personal saving rate, as noted above, is near historical lows. Wage income generation, also as noted above, is lagging as never before. And, as the US property cycle nears its secular peak, asset-driven consumption strategies will be challenged as never before. All this speaks of a US consumer that is lacking in staying power and therefore vulnerable to the slightest of shocks.

Myth #5: The world is now on the cusp of synchronous recovery in the global economy

He feels that the global economy is essentially a 2 engine machine, China on the supply side and the US on the demand side. US consumers are on thin ice and China is trying to cool off its economy. Weaknesses in these two economies would make it difficult for a recovery to be sustained.

For my money, there can be no mistaking the reality check of this summerís disappointing data. This recovery now looks more mythical than ever.

It seems like there have been more and more of these kinds of reports from mainstream sources. Does not give one comfort. Plan accordingly.

soccerdad :: 12:37 PM :: Comments (5) :: Digg It!