U.S. recovery – a mixed scorecard
Ultra-low interest rates and massive liquidity injections have acted like a painkiller, stabilising the U.S. economy and preventing it from going into shock. But they have not cured the underlying problem of over-extended households and an economy dependent on increasing consumer indebtedness as its main source of growth.
The result is a highly uneven recovery. While many parts of the manufacturing and the service sectors are rebounding strongly, those most dependent on credit, particularly housing and autos, and others associated with them such as home furnishing remain depressed.
Low rates have largely solved the cash flow problem, at least for households that have remained in employment. But household balance sheets are still undergoing what is likely to be a long and painful period of adjustment that will continue to act as a drag on credit-driven spending for several more years.
It is not clear monetary or fiscal policy can help much more in these areas. It was precisely overspending on cars and homes that got U.S. consumers into such a disastrous financial position during the mid and late 2000s.
Households have no real income growth to finance renewed spending on big ticket items and lack the confidence needed to take on much more debt to finance extra consumption. Even if confidence somehow recovered, most lenders remain wary about the poor creditworthiness of potential borrowers and the weak state of their balance sheets.
NO BIG TICKET SPENDING
Charts 1 and 2 show how the major categories of consumer expenditure changed between Q1 2007, which was before the subprime housing crisis began to really bite, and Q1 2010.
from Commentaries:
Japan takes a kinder approach to growth
The victorious Democratic Party of Japan did not put economic growth at the heart of its electoral sales pitch. The party's manifesto mentions "growth" only once. The word "support", by contrast, appears 19 times.
Even so, there are reasons for optimism that the DPJ's softer and more nurturing policies are just what the economy needs.
The global slump provided a painful reminder of the dangers of Japan's export-oriented growth strategy. Output has fallen even faster than in other rich countries, leaving national income at roughly the same level as in the early 1990s.
After two decades of stumbling between recessions, policy makers need to convince their citizens to spend some of their vast cash savings, which are now equal to 1.5 times GDP. Making the Japanese feel more secure may be the best way of doing this.
There is plenty in the DPJ's platform that looks encouraging. If Japan's new government can enact election pledges, Japanese citizens would have fewer reasons to hoard cash.
Parents would benefit from a generous child allowance. High-school education would be made free and university scholarships more plentiful. For the elderly, there would be a minimum guaranteed pension of at least 70,000 yen (about $750) a month. The unemployed would get 100,000 yen (about $1,100) a month during job training.
There are two problems, however. The first is how to pay for this largess. The party's belief that its $180 billion social agenda can be financed by cutting wasteful spending has left some economists unconvinced. A good deal of the fat in the budget was cut out when Junichiro Koizumi was prime minister from 2001 to 2006.
Japan, a nation ten times as densely populated as the U.S., is so badly over-crowded that they are incapable of consuming products at a rate necessary to gainfully employ their labor force, thus making them utterly dependent on manufacturing for export. (It’s a fact that over-crowding reduces per capita consumption, simply due to a lack of space for using and storing products, beginning with housing.)
The DPJ is faced with an impossible situation. Japan is doomed to rising unemployment and poverty as nations like China and India begin to muscle in on their export markets.
Pete Murphy
Author, “Five Short Blasts”
Japan: The mother of all miserable recoveries
(James Saft is a Reuters columnist. The opinions expressed are his own)
Investors met the news that Japan’s economy has emerged from a bone-breaking recession calmly and rationally: they sold shares quickly and in large amounts and made bets that consumer prices are going to be falling for years to come.
That’s because Japan’s recovery, coming as it does after a global bubble in the production of what I call, for lack of a more technical term, “stuff,” is really not sustainable.
The fact that the consumer portion of the recovery is only a reflection of income transfers from government to individuals isn’t very encouraging either.
More importantly, given that hopes for Japan were low anyway, the vulnerability of its recovery point to some important challenges the nascent rebounds in the U.S. and Europe now face.
Japan grew at a 3.7 percent seasonally adjusted annual rate in the second quarter, in data reported on Monday, quite a contrast with the almost 12 percent annual rate of contraction in the three months before.
The recovery was heavily dependent on consumer spending, goosed by government subsidies for buying hybrid cars and green appliances, as well as a heavy public works spending.
You swirl around the real point but don’t say it explicitly: business can’t re-invest in itself because it has to de-leverage first. A lot. It’s I suppose a similar theme to the public-at-large, too much debt that must be paid down before we feel comfortable buying the new car or house or big-screen TV. No stimulus or gov’t intervention can possibly change this, only delay it or slow the rate of it. Bottom-line, we need to accept the tme of de-leveraging and hope it goes as quickly as possible. As for businesses trying to gussy-up their balance sheet by slashing costs (which works out to our jobs, not bonuses for those #$&*^%#&), it’s ultimately self-defeating and will make the inevitable even more painful. Great depression move over, you’ve got company!
Stress test the consumer
– Christopher Swann is a Reuters columnist. The views expressed are his own –
People can be divided into three classes, it has been said: the haves, the have-nots and the have-not-paid-for-what-they-haves. The prevalence of the third category may be the biggest single source of vulnerability for the U.S. recovery.
A stress test of the consumer could reveal more distressing results than the one conducted on the banking system.
Debt is at high levels — 130 percent of disposable income, or more than twice its peak in the late 1980s. A slide in net wealth has reduced the collateral Americans can draw upon for emergency loans. Finally, it is now harder to borrow money for new consumption or to roll over existing debt.
Like a compromised immune system, this weakness makes consumers extremely susceptible to further shocks. Traumatic as the recent bout of retail restraint may have felt, worse may be in store. After all, consumption rose by 18.5 percent in the seven years to 2008. So far it has only fallen back by less than 2 percent.
There are several potential mishaps that could swiftly undermine consumer spending and set the recovery back to square one.
Among the most likely problems would be a continued slide in house prices. Even on the conservative measures used by the Federal Reserve, the value of residential real estate has fallen 18 percent since 2006.
Unfortunately, today we face the effects. Jobs are being lost. What was once a two income household is now a one or no income household? Granted many of us have borrowed against future income and now it is difficult or impossible to repay that loan. Many will make mortgage and car payment while buying food and what clothing is necessary and the rest will go by the wayside. The rest will just hope they don’t take home and car to soon. It is sad.
Now for anyone to state that Gas prices didn’t contribute to the collapse get off you bicycle and try driving to work. I would love to get off of gas and onto a better more economical and efficient mode of transportation but the auto industry has done nothing since the last oil crisis in the 70s to bring the internal combustion engine to its fullest potential or put out a viable alternative to the gas guzzlers. What do they give us but toy cars like the Volt and crap like the hybrid? No we should not have bailed out the auto industry. They have brought this debacle unto themselves. I would have loved to see new blood come out and take over our auto industry.
The consumer is always the ultimate payer. We pay while our voice is silent in Congress. We pay while CEOs are paid 100 times their worth. We pay as our retirement funds are slashed in half and our government does absolutely nothing to bail us out. You could run a consumer stress test but, we would fail.
The recovery will feel familiar: lousy
– 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.
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…
The massive unemployment being paid out to millions is funneling any trace of economic growth. These “glorified welfare recipients” are getting almost all their previous salary and this fill continue for at least 2 years!!! Why would any of them seek employment?