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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Another major aspect of building a balanced economy is eliminating our trade deficit, thus restoring the manufacturing sector of our economy. It’s not at all clear how that will be accomplished, especially with the administration publicly disavowing protectionist measures. Overpopulated nations dependent on exports will increasingly turn to unfair trade practices (like “dumping,” as the Japanese have been doing) in order to sustain their U.S. market share.

Posted by Pete Murphy | Report as abusive

What about the fact that the huge amounts of money in the system are likely to cause inflation. Also, you stated a while back that some banks would probably be nationalised in the months ahead. What about credit card defaults rising, or commercial property loans in jeapody, or increasing loan defaults, or the Chinese moving from buying the Dollar and so jeapodising it, or the massive world demand for money putting the Bond market at risk, or all the other economic problems out there.

You really think that we are through the worst of it? Well, maybe I am just being too pessimistic but it seems like the lull before the storm.

Posted by D Rumsfeld | Report as abusive

I don’t think pessimism should be the word but realism should. The media is so desperate positive sick that when the economic decline slows a per mill they’re chanting. Advice: Don’t!

The real crises hasn’t even started yet. Many Jobs have been lost forever and more unemployment lays ahead. I know it’s business as usual for the financial media but they’ve been doing a lousy job until now and I don’t see any improvement.

Japan is the example where we’re heading. This means a everlasting crises situation. Be real and look at the Japanese situation today which will tell you what realy lays in store for us.

Posted by Youri Carma | Report as abusive

I do not see a trend towards a more balanced economy – just the opposite. With manufacturing on the way out due to high costs in labor and soon a huge new energy tax that will raise the cost of all materials substantially, I see momentum going must faster to an all service economy.

Those who are smoking their bongs and talking about a green economy with new green jobs are likely sitting in their ivory towers – never having run any business.

Tell me, how are we going to grow our manufacturing sector?

Posted by Guy Thompto | Report as abusive

I was not aware that we are ‘passed the worst’ as of yet.

The banks were capitalised with public monies, the credit markets are still largely locked and inflation is just round the corner.

The consumer ‘confidence’ spasm in January is the result of the substantial drop in prices and also the free-fall of leisure expenditure (restaurant, hotel, travel) in favour of home entertainment.

Whe the CDS market will drop anywhere close to 10-15 trillion and the stock exchange will stabilise (no bull**** bull in a bear market), then we are out of this mayhem.

And with a couple financiers only in jail after the largest scam in the history of the mankind, the Gov’s of the G7 nations do not give any ‘lessons learned’ example for the future….keep throwing in jail kids that steal 500 bucks worth of c**p and keep the ‘qualified’ thievs out…

Posted by McChiavelli | Report as abusive

So, can business spending in the U.S. take the baton from exhausted consumers?
No, it cannot. Simply for the reason that, as you have rightly pointed out, the economy if consumer-driven and has been geared towards that goal.
This means that if jobs go and salaries diminish, there is not only a direct effect on the companies that sell the stuff consumers no longer can afford, but also an indirect effect on everything connected to those companies. In my view, this hasn’t even started to ripple through the system and thus I think you are way to optimistic.

Posted by Robynne | Report as abusive

We are experiencing a bear market rally. Market movement is not linear. Fuel prices will rise as production is cut and demand increases elsewhere in the world. The dollar will inflate. There will be more job losses perpetuating the downward spiral of decreased GDP followed by more layoffs. Globalization has limited our choices of strategies to stabilize the economy.

Environmental and other catastrophes will put pressure on the federal government to print more money to mitigate suffering. Balance of trade will remain lopsided as the foreign goods and resources we rely on continue to rise in price. All of this raises the specter of rapidly spiraling inflation.

James, do you really think the worst has passed?

Posted by Anubis | Report as abusive

I have been following your articles for some time now. I remember one distinctly. Do you STILL predict the government will have to take the major banks into receivership by the fall? If you have seen the ridiculous interest rates that they are demanding for credit (other than mortgages) it seems like they should be able to find a way to make a profit.

Posted by J | Report as abusive

The author assumes A LOT with his assumption that “…the financial crisis is past!” The lid comes off Thursday nite @ 9 pm EST on the website…a show that will trace 93% of the ’emergency bailout’ funds went to 25 of the 8500 financial institutions and make the connection to campaign contributions…hopefully there will be a hailstrom of public outrage but non contributory to the MSM’s phantom recovery!

Posted by Lefty | Report as abusive

Interesting that my anti-spam word was TOAST, because that is exactly what the US consumer is. I have already seen the writing on the wall. With such a massive downsizing of production and inventory, all of a sudden, what’s left will become very expensive as buyers have to fight over the shortages remaining. This will be the trigger for a massive inflation which of course has been initiated by the Fed printing so much money. For years I have noticed the disconnect between government reported inflation and the actual prices that I am paying for every category of product and service except, perhaps, for computers. This is another obvious symptom of the corruption of the free market. Unless the corruption is tackled, we will continue the long flush into the cesspool of history. Nobody seems to get it. Nobody has the guts to address it, so the longest lasting historical general rise in standard of living in the world is at an end.

No I don’t think this is over. We are in a brave new world of diminishing supplies and wealth. 8 years of Bush/Cheney was just too much for the system to bear.

Posted by Jonathan Cole | Report as abusive

I must have missed the switch when the media stopped selling pessimism and started selling optimism. Our past style of self indulgence is finished. The country will be lucky if it ends up a second world player. You don’t believe that? Take a drive through the Midwest and any rural area. Everybody who had anything to do with this mess should be in jail or shot.

Posted by AJ Franks | Report as abusive

Interesting, your anti-spam word ‘IKEA’ seems to me another attempt for the American consumer to consume, consume, consume. That ain’t gonna happen, with a lot of us broke and in debt and the rest of us not willing to spend on anything nonesential because of our collapsed house values, IRA/401k balances and fear for becoming fired or laid off from our jobs. But like a few other posters, I feel that we’re in a lull between two storms. An analogy to the 2005 Hurricane Season at New Orleans is apt: what’s been is nothing compared to what’s to come, especially with China no longer buying US Treasury Debt. In the beginning of June, we had Hurricane Cindy — lots of wind. At the end of August was the great and terrible Hurricane Katrina — lots of wind and a very bad flood.

Posted by Ed-M | Report as abusive

The Fed continues to monetize debt rather than equity (indeed I believe the law requires that). This means that we will not get enough money to pay off our overhang of debt. Consequently, the crisis will continue.

Posted by James Richard Spriggs | Report as abusive

Has the media brushed aside the Option Arm and Alt-A mortgages set to recast beginning the second half of 2009? Some estimates put the cost at three times that of the sub-prime mess. Moreover, how can we sustain an economy if most of us have no money? I don’t recall any news of mass hiring, nor do I remember reading the headline, “Universal Wage Increases All Around!” As was mentioned above, we are walking down the same path as Japan, though I think we will loose more than a single decade.

Posted by jb | Report as abusive

I agree with many of the comments that question the notion that we have indeed put the worst behind us. The last 8 weeks have been a very sucessful “spinning” exercise to present “better than expected” macroeconomic readings and analysts coporate earnings results that will usher in a new Golden Age. I am beginning to feel like “special agents” are trying to put me back into the “Matrix.” But alas, I have seen the real world…. Fool me once, shame on you. Fool me twice, shame on me.

Posted by Peter S | Report as abusive

If we look closely at the products that we buy made in China, there are a limited number of times a person would make those types of purchases. How digital cameras can a person own for instance. We add to this the general demographic trend. People are getting older. So in the future I would expect to see more consumer spending focused domestically. The slowness in growth is not just a lingering aftertaste but a sign of changing consumer tastes and needs.

Posted by Don | Report as abusive

I think this article is a fairly well reasoned description of where we are and where we are headed in the near future. However, the amount of money being thrown around eventually will cause a severe inflationary cycle. It appears to me that this is part of the plan to reduce the impact of the huge debt. Handling this upcoming inflationary cycle will be equally difficult.

Posted by Dean Van P | Report as abusive

The worst is over? Wall Street still still not reconciled with Main Street, their contempt will be their ultimate undoing. The delusional trading and credit markets disconnected long ago. Real wages declined and now real jobs are rapidly disappearing. Globalization and privatization effectively the gun which shot the US economy in the foot. Debt was encouraged by loose monetary policies over two decades, markets were opened to every tom,dick and hariette to speculate in a free-for-all. This included commodities and other economic lynch-pins, particularly housing/real-estate. Enterprises massively expanded including the financial banking sector globally with interdependencies which are sick and incestuous; included governments and regulatory agencies.

I ask one question. What will lead the USA into positive production, supply stable employment and allow earnings of a living wage? Should people fund an ordinary life solely through debt on false inflation for their lifetimes? I think not. The rubber is about to meet the road after being in the stratosphere. Are we to be reduced to delivering pizza’s to each other?

Until we produce more than we consume, save more than we spend the US economy will continue to bump along a bottom. Increasing numbers of people are not given the opportunity to participate even with high education levels, as every aspect of life is fodder and rigged for debt from cradle to grave. A return to an ownership society will be massively painful but is the only path to a sustainable, healthy economy that provides individuals obtainable opportunities and rewards for discipline/prudence over risk/speculation.

Confidence broadly is lost, regaining trust will be a Herculean but necessary task in banking and markets. Currently opacity and overly complex markets taking trillions of support from government without terms is compounding the economic reality of citizens in frightful ways. The ratio of opaque stimulus to the financial sector versus direct stimulus is still horrifically lop-sided. Taxpayers and working schmucks are asking what is the return on our new status of shareholders. Where is my dividend check and why is Merrill in the business of storing oil offshore on my dime only to falsely inflate heating my home this coming winter? Enough already.

Posted by NS | Report as abusive


Posted by gd | Report as abusive

Sounds made by the deflating asset classes during the GFC

1. property – denial

2. equities – disbelief

3. bonds – pop !

Posted by gd | Report as abusive

“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.

Posted by bill gordon | Report as abusive

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