The recovery will feel familiar: lousy

May 5, 2009

James Saft Great Debate – James Saft is a Reuters columnist. The opinions expressed are his own –

The good news that the United States cannot keep contracting the way it has been is not to be confused with a return to robust expansion, a point financial markets eventually will grasp.

Consumers, the mainspring of the U.S. economy, will see the cash from government stimulus slip through their fingers but will still face very ugly personal balance sheets and a brutal job market. Their party is not going to get started again for some time.

And falling interest rates will have a hard time sparking investment by businesses until they become convinced that a recovery in manufacturing will do more than just take inventories from nearly empty to barely stocked.

The basic hope for the U.S. economy, that inventories are being run down so swiftly that a turn in the cycle must come, has been more or less confirmed by recent data.

The ISM manufacturing index advanced to 40.1 in April from 36.3, and especially encouraging is a sustained rebound in new orders, a leading indicator of forward demand, which having been more or less moribund in the early months of the year, now is in a sustained uptrend.

Inventories are still being cut, but this, optimists argue, is setting the stage for a recovery when managers see that their depleted stocks represent the threat of losing out on business.

There was also a surprising 2.2 percent increase in real consumer spending in the first quarter, as opposed to the shocking fall of four percent in the second half of last year.

We simply can’t fall at the same rate we have been if that keeps going. It probably will and we will probably see a sort of a recovery kicking off in the second half. Even now, billions in stimulus are sloshing through the U.S. economy. In May social security recipients will get an extra $250 and withholding rates for federal tax have been cut.

But the effect of government money will recede, and while stock markets have rallied, the balance sheets of many Americans are still very fragile. Remember too that the U.S. is aging, and many savers approaching retirement have seen zero investment gains in their portfolios over periods as long as a decade.

Their garages are full of junk they probably feel they don’t now really need, their employment prospects are as bad as in living memory and they face a very long retirement due to expanding life expectancy. Wages and salaries have fallen by 1.2 percent over the past year, an all-time record, and hardly an incentive for the average American to start splurging again.

Savings is here to stay and consumption will have to take a back seat.


So, can business spending in the U.S. take the baton from exhausted consumers?
It probably cannot. First off, businesses are less interest rate sensitive than consumers, and so the effects of the official policy of driving market rates down will have less impact among them.

And while inventories are still low, so is final demand and most corporate managers, having just lived through the most gut-churning time of their entire careers, will not be likely to stick their heads above the parapet and make a lot of speculative investments in new capacity simply because things have stopped looking worse.

This may get to the heart of the problem that the economy will have in making a robust recovery: psychology. Just as people were too optimistic before the crisis, they are likely to remain too pessimistic for a time afterwards.

There is also the matter of sheer scale. Consumption is about 70 percent of the U.S. economy  while capital expenditure at about 8 percent will have a hard time being the engine of a robust recovery. That 70 percent must fall and will outweigh everything else.

Perhaps the proof of a turnaround in business activity will be corporate profits, which across the economy are still falling. Corporate profits allow businesses to expand and give them the cash to do it and the evidence needed to secure credit.

And finally we have a banking and financial system that, while improving, is still not able to intermediate credit properly. That the Federal Reserve is taking matters into its own hands is on balance good, but they are likely to make some ghastly mistakes, not to mention putting their very independence in jeopardy.

Balance sheet recessions, when cutting debt is a priority, take a long time and are characterised by disappointments.

We are past the worst of the crisis, but now moving on to something not as dangerous but just as hard: building a more balanced economy.


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“lefty” makes an interesting point and provides a great web link concerning where the money went. Reminds one of the Elliott Ness observation – to solve a crime, follow the money. If the current economic strategy isnt criminal, it certainly is fiscal lunacy. The only solution is to reverse a 50 year decline in manufacturing contribution to GDP, and trigger immediate across the board stimulation by putting $$ back into the taxpayers hands. How about a $10,000 tax rebate for everyone. Then, as others have suggested, start putting politicians and bureaucrats in jail with their banker political contributors, before they bankrupt the country.

Posted by Righty | Report as abusive


Posted by gd | Report as abusive

Conservative savers getting 1% on their savigs in a 6% inflationary environment.A controlled contrived B.S. stock mkt. with a high rate of job loses still happening.Yeh ill say the economy still stinks to high heaven.

I concur with the author on many of his points. Perhaps our differences as a group of readers lies in the meaning of the word “worst”.” To some who are being towed by a lifeguard after near drowning, that is better than the worst they were experienceing which is near drowning. Others don’t feel that way until they two weeks past the event and the worst day of their life is well past. Someone still unemployed and losing a home is unlikely to see that that things are any more rosy than the person who has not be visited yet by a lifeguard. Perhaps we could agree that statistically we have better numbers than last fall but whether that will remain only time will tell. I believe that we have failed ourselves by allowing our R&D to go overseas and by not factoring in the cost of fighting all these wars as that money funds some of our enemies. Those here who ultimately profited on the offshoring should get a bill for the real cost that is being borne by the American people. But it looks like Congress, both parties, are going to fight that.

Posted by Steve | Report as abusive

The spike in consumer spending that we’re now seeing is the result of people putting off essential purchases for the past 4-6 months (since the market melted down in Sept 08.) But once this spike is done with, we are left with many consumers who have come to realize in the past months that we can do very well without a lot of frivolous spending on things we don’t really need. There is now a more concerted effort to save because many consumers have seen the light and that there really will be rainy days in the future to save for. I don’t see the recovery to be very strong either as we are no longer a nation of ‘fervent’ consumers. So, what else is there to drive the economy?

Posted by marc | Report as abusive

Re: “Their party is not going to get started again for some time.”

I lived through the depression of the 30′s, which ended only because WWII stimulated our manufacturing. It took 10 years. Now, with greater debts, and no manufacturing sector, THE POOR may never come back.

Try this: split our population into two halves – based on net worth. Treat them as two separate countries. Prepare a forecast and an outlook for each separately. Write two articles.

(If you need a quiet place to work, come down to Bolivar
Island in Texas. We could do a forecast for those people, too.)

Posted by SpudM | Report as abusive

Spud M, I don’t think a war can pull us out this time. It might just put us out.

Posted by Anubis | Report as abusive