Friday :: Sep 10, 2004

The Economy: Spinning its wheels?

by soccerdad

Steven Roach of Morgan Stanley has his Friday economic assessment posted.

He notes that Greenspan, in testimony before Congress, said that “the expansion has regained some traction” and that the "soft patch" last spring was related to energy prices.

Roach's comments: With all due respect to Mr. Greenspan, at this point in time, such a claim is largely an assertion based on a very creative interpretation of ever-volatile hard data. In my view, the case for traction in the US economy remains a weak one.

First what is meant by "economic traction".

The concept of “economic traction” is not well understood. As I see it, traction comes when a cyclical recovery can truly stand its own. It is, first and foremost, a matter for the consumer -- the heart and soul of any sustainable economic recovery. Traction reaches a critical mass only when the internal dynamics of the business cycle push the wage income portion of personal income generation above trend. Then, and only then, can autonomous growth in consumer demand be sustained on its own. Consumer traction is also the linchpin in providing ancillary support to the “derived demands” of business capital spending and inventory investment. Without consumer traction, the case for sustainability remains a real stretch.

According to Mr. Roach the recovery is yet to stand on its own. The US economy has had support from artificial factors: massive policy stimulus (monetary and fiscal), saving depletion, the levering of assets, and the costless funding of domestic growth by foreign central banks.

Normally, wage income growth facilitates a transition from recovery to expansion. However, over the first 32 months of this recovery, real wage and salary disbursements have recorded a cumulative increase of just 2.2%. The average increase measured over the last 6 recoveries was 10.6%. So the current recovery is very anemic.

The income shortfall of this expansion a by-product of America’s notorious jobless recovery and a concomitant compression of real wages.. Note that nonfarm payrolls are only up 0.3% over the first 33 months compared to an average increase of 7.8% over the last 6 recoveries.

But have things gotten better in the last few months as Greenspan has said? Mr Roach doesn't agree because: 1. change in real consumption averaged over June and July was 0.2%; 2. disappointing back-to-school sales in August; 3. softness in auto sales; 4. mounting evidence of inventory backup (increases in June and July largest since before recession)

He also notes that Corporate America is not providing any traction of its own. the three-month average increase of 104,000 for nonfarm payrolls remains decidedly subpar by any standards -- about one-third slower than the typical recovery pace and equally short of gains required to keep the unemployment rate stable

But the most fascinating insight of all into business attitudes may be the $38.7 billion spike in corporate stock buyback announcements that occurred in July -- the strongest such surge in 20 years and fully four times the average monthly pace of the past year. This, perhaps more than anything, puts Corporate America’s cards squarely on the table. Awash in newfound earnings and cash flow, companies would rather buy their own shares than embark on growth oriented strategies of hiring, boosting compensation, and adding to productive capacity

With the effects of the tax cuts wearing off the economy then comes face-to-face with the lingering imbalances of subpar income generation, sharply reduced saving, an ever-widening current-account imbalances, and a record overhang of household indebtedness.

He concludes For an income-short American consumer, traction remains as elusive as ever. A structurally-impaired US economy might only be spinning its wheels.

Other analysts, Berner and Patel, at Morgan Stanley have in the past been more optimistic than Roach. But todays report, which follows Roach's on the web page is decidedly more pessimistic than usual.

The Morgan Stanley Business Conditions Index (MSBCI) fell to 47%, a drop of 7 points the lowest since April 2003. We won’t try to sugarcoat this result: That the MSBCI pierced the 50% threshold means that business conditions are deteriorating. The advance bookings index plunged by another 15 points to below 50%, hiring plans moderated, and financial conditions tightened

They think the data is best explained not by higher energy prices but by a more lasting downshift to subpar corporate and thus economic performance. However, they do note some caveats that prevent a certain determination of the underlying cause of the poor performance.

They conclude: We’d be the first to agree that recent macro data are hardly conclusive signs that the recovery is again getting “traction;” they are instead merely hopeful. But while the results presented here are daunting, we remain resolutely optimistic

Well we'll see. I'm a pessimist by nature and know that "wishing doesn't make it so".

soccerdad :: 1:10 PM :: Comments (7) :: Digg It!