Words ought to be a little wild, for they are the assault of thoughts on the unthinking
- J.M. Keynes

Friday, 16 November 2012

This Time is Different


Poring over history shows that nothing is different. In that sense, the current US recovery is following a familiar pattern as shown by Reinhart and Rogoff. However, historical schadenfreude does not ease present pain. Habituated to quick recoveries, Americans are shocked at the sluggishness of the current one. It is certainly different from all the post World War II recoveries as Graph 1, 2 & 3 show.

Graph 1: Number of years taken to surpass pre-recession per-capita GDP peak











Source: Conference Board Total Economy Database™

Graph 2: Real GDP growth following recessionary trough (rebased to 100 at start)











Source: U.S. Bureau of Economic Analysis

Graph 3: Unemployment rate following recessionary trough











Source: U.S. Bureau of Labour Statistics

Despite it being a big issue in the recent presidential election, there is very little that presidents or even central bankers can do. Despite the copious amounts of ammunition expended by Bernanke & Co. economic forces created by the financial and housing bust are holding back a swift recovery as they always have. In fact, the weakness of the recovery in face of the strength of Bernanke’s attack is concerning. Apart from the obvious ineffectiveness of monetary easing in face of a liquidity trap (something I have been banging on about for some time, for example this and this) it is storing up problems for later.

Bernanke has floored the accelerator yet the car refuses to move. The Fed funds rate is the lowest it has ever been both on a nominal and real basis (Graphs 4 & 5). The steepest yield curves in a recovery are providing further impetus to bank profits and helping them rebuild their balance sheet (Graphs 6 & 7). However, industrial recovery is average at best (Graph 8) with capacity utilisation woefully low (Graph 9).

Graph 4: Fed funds rate following recessionary trough











Source: Federal Reserve

Graph 5: Real Fed funds rate following recessionary trough










Source: Federal Reserve

Graph 6: Yield differential between 10Y and 2Y UST following recessionary trough










Source: Federal Reserve

Graph 7: Yield differential between 10Y and 5Y UST following recessionary trough










Source: Federal Reserve

Graph 8: Industrial Production Index following recessionary trough











Source: Federal Reserve

Graph 9: Capacity utilisation following recessionary trough










Source: Federal Reserve

A more circumspect US consumer is one of the main reasons for the slow recovery. Growth in both consumer credit and real personal consumption expenditure has been the slowest since the 1950s (despite record low rates). This is shown in graphs 10 and 11. This is because the consumer is still weighed down by his debt binge during the Greenspan era (Graph 12 – blue line following the 1991 recession and orange line following the 2001 recession). Bernanke’s low rates policy has not encouraged more borrowing but it has made this debt burden easier to bear (Graph 13).

Graph 10: Consumer Credit following recessionary trough (rebased to 100 at start)










Source: Federal Reserve

Graph 11: Real personal consumption expenditure index following recessionary trough









Source: U.S. Bureau of Economic Analysis

Graph 12: Consumer debt / GDP ratio following recessionary trough









Source: Federal Reserve, U.S. Bureau of Economic Analysis

Graph 13: Financial Obligations Ratio (FOR) following recessionary trough










Source: Federal Reserve
Note: FOR includes Mortgage payments, Consumer debt, Auto lease, Rent, Home Insurance and Property Tax

Moribund consumer finances are being compounded by idiotic austerity. Failure to reduce government debt during booms has now come back to haunt policymakers. With the worst post-war debt/GDP ratio (Graph 14) it is no surprise that real government consumption expenditure is declining (Graph 15). Even without the fiscal cliff, the government is retarding recovery.

Graph 14: Debt/GDP ratio following recessionary trough








Source: U.S. Bureau of Economic Analysis, www.treasurydirect.gov

Graph 15: Real government consumption expenditures and gross investment index following trough (rebased to 100 at start)









Source: U.S. Bureau of Economic Analysis  

These economic facts in addition to ideological battles have hamstrung the fiscal response to the crisis. Therefore a sharp upturn is unlikely and the investor has to adapt to these “different” circumstances. The script is familiar within the US. Slow growth and muted corporate earnings are likely to cause equity price revaluation, a process which has already started. Amidst this backdrop easy monetary policy is unlikely to be reversed which means that the hunt for yield will continue. At some point, equities will need to be bought and fixed income sold, but that point is not here yet.

Globally the picture is more interesting. The die is case for anaemic global growth with consequent problems for export-dominated economies. The US was the global economic engine pulling out other nations from their recessions. Recovery occurred relatively swiftly from the Latin American crisis, Tequila crisis, East Asian crisis, Russian crisis and the dotcom bust because the US consumer and the economy kept chugging along. Now the situation has changed. Neither can the US bestow largesse (as was the case in Latin America and Mexico) nor can it continue to consume bric-a-bracs made by other nations at the same pace. Moreover, with Europe mired in crisis and China’s lopsided development showing signs of strain there is no one to supplant the consumer of last resort.

This is especially bad for Europe which has staked its resurgence on the twin planks of austerity and export-led growth. The first has demonstrably failed. The second is about to fail. In addition, with the presidential election over, the imperative to keep the farce running by throwing money through the IMF is no longer there. It is now a question of when the dominoes fall.

Surprisingly, the gloomy environment favours the dollar despite the Fed’s best efforts to cheapen it. The US economy will continue to outperform given its size (in area, resources and population) and resilience. Europe’s woes and Chinese wobbles will only enhance the allure of the dollar as a safe haven (the Yen is not a safe haven, Swiss have tied themselves to the European mast and the Australian dollar is a commodity play in a slowing economy).

This time may be different but ultimately there is no difference in the importance of USA to the global economy and its global standing.

No comments:

Post a Comment