8/8/2012 4:13 PM ET|
No 'real' recovery until 2017?
The recession is officially over, but by the measures Americans care most about, the recovery hasn't begun. New research suggests it won't really get going for 5 more years.
By any measure you'd care to use, the economic "recovery" to date has been a massive disappointment. Yes, housing has finally started to show signs of life. Yes, corporate profits are at record highs. And yes, as outlined in my recent columns and blog posts, I expect stocks and other risky assets to rise over the next few months.
But stepping outside the jaded bounds of Wall Street insiders, real-world measures just don't add up to a recovery -- despite all the bailouts, stimulus and other policy salves that have been tried.
Wages are stagnant. The job market is a joke, with structural deficiencies and a skills mismatch that has companies in key growth industries complaining they can't find people to hire even as the unemployment rate remains above 8%.
Yes, the overall economy has moved beyond recovery and into expansion -- in the strict sense defined by economists. But by the measures that matter to regular Americans, the recovery hasn't really started.
In fact, one could make the case that for the middle class, the economy hit its peak during the Clinton administration and has been sliding lower ever since in a long malaise -- hidden for a time by the housing bubble -- reminiscent of the Long Depression of the late 1800s.
So when do we get our recovery?
Bad news: This malaise is unlikely to end before 2017, according to persuasive new work by Société Générale economists. And along the way, we'll be vulnerable to the kinds of shocks and market panics currently pulling the eurozone into a new outright recession amid political rancor.
Why? Keep reading to find the details, but here's starting point: too much debt.
A 1.7% weakling of a recovery
This is a topic I've frequently hit on over the last three years in the context of my big, overall thesis for why the economy and the stock market have been so terrible for so many for so long: the "DDs" of deleveraging and demographics.
Today, it's all about deleveraging -- paying down a debt load that totals some $8 trillion in the West and is acting as a constraint on economic growth. I explored this issue in February in "The world's $8 trillion debt hole."
(I addressed the demographics in "Are baby boomers to blame?" back in May.)
Compared with other postwar economic recoveries, this one has fallen abysmally short. More so if you consider the fast-down/fast-up rebounds typical of financial crises. The economy went down hard. That, because of the way the business cycle is supposed to work, should've earned us a robust, 1980s-style rebound. But it hasn't.
Credit Suisse economist Neal Soss notes that based on recently revised numbers for the U.S. gross domestic product, the economy is just 1.7% larger than the prerecession peak it hit 18 quarters ago, adjusted for inflation. For mild recessions, the average growth at this point from the previous peak was 12.1%. For severe recessions, it was nearly 16%.
And it's not as if we're picking up momentum: GDP growth slowed to just 1.5% in the first quarter. That, because of the twisted logic of the markets these days, has helped stocks rebound on the hopes that growth is weak enough to inspire additional stimulus from the Federal Reserve but not so weak as to threaten outright recession. Indeed, earlier this week, Eric Rosengren, the president of the Boston Fed, called on policymakers to consider open-ended bond purchases to push more cheap cash into an economy that's "treading water" -- this on the heels of a $1.7 trillion Fed bond purchase program that ended 2010 and a second, $600 billion effort, that ended last year.
Too many savers
There are many economic yardsticks, but focus with me on the one nearest and dearest to Americans: spending.
New research by Bank of America Merrill Lynch shows that spending, especially on services and big-ticket items, has been exceedingly weak this cycle. Digging into the data, the shortfall has been focused in housing-related services as people, soured by the housing bust, just didn't feel the need to splurge on contractors and landscapers.
During the Reagan recovery of the early 1980s, the services sector contributed nearly 3% to overall GDP growth. In the late 1990s, it was around 2.5%. During the housing boom, it was around 1.5%. Now, it's near 0.2% and falling.
Households are acting in their own self-interest. Shocked by a loss of wealth, fallen home prices, a drop in confidence and pandemic of negative home equity, people are focused on deleveraging -- paying off debt -- despite the lowest interest rates in history.
Yet this newfound zeal for economizing is a big reason that the recovery stinks. It's John Maynard Keynes' "Paradox of Thrift" playing out in real time: One person scrimping, saving and paying off debt is praiseworthy, but an entire populace doing it at the same time (along with the government) merely prolongs the pain for everyone.
We could dig even deeper, looking at the causes of the loss of labor's share of the wealth over the past 30 years and how cheap credit dulled that pain for a time. There's plenty to say on things like trade policies and the division of income. For the sake of brevity, just know that we'll be dealing with the consequences of these oh-so-easy trade-offs for years to come.
Five more years
Getting into a debt hole is easy; climbing out is hard. Historically, academic research shows that it takes an economy five years to return to pre-crisis growth rates after a financial shock. But given the global scope of our problems, the weak demographics of aging populations, structural deficit problems in the developed economies, the eurozone crisis and tighter bank oversight (good in the long run, but tighter credit for the short term), the Société Générale team believes it will take a decade to heal this time around.
By its count, we're just five years in.
There are only a few ways out: strong economic growth, difficult when consumers as well as governments are focused on deleveraging; austerity, which is only making things worse in Greece and Britain; widespread debt defaults, which would require Spanish-style bank recapitalizations; and high inflation, which tends to pinch consumer spending and deepen the divide between the 1% and the 99%. None of them is easy. The right solution is a careful mix of all four.
Get the mix of policy wrong, say by overemphasizing short-term budget austerity, and the debt burden only grows as recession returns. It's fiscal quicksand.
Société Générale economists note that policymakers in the advanced economies are fumbling through the fix -- a "muddle-through" path that instills neither confidence nor optimism and leaves economies vulnerable to downside shocks.
Here at home, the result has been a 1.5% GDP growth rate that just isn't going to cut it. Republicans and Democrats can't seem to have a meaningful conversation about how to get this higher; and a lack of bipartisan cooperation means the "fiscal cliff" of tax hikes and spending cuts worth nearly 5% of GDP still looms large in 2013.
Should this continue, the Société Générale team worries that the muddle-through will mutate into something much worse: rising tensions, an angry populace, social unrest and political tension. I explored that outcome late last year in "Why all signs point to chaos."
Eventually, we'll simply run out of money. According to Credit Suisse's Soss, based on current trajectories, in 2024 all federal tax revenue will go to entitlement spending and interest payments. Nothing else.
We need job creation
They key will be to tap the one segment of the economy that isn't focused on deleveraging and isn't burdened by debt: Non-financial corporations. Big business is holding more than $1.7 trillion in cash, according to Federal Reserve data. These guys aren't spending on things like inventory or investing in new capital assets.
In fact, even as the economy returned to growth in 2009, U.S. manufacturing capacity declined. In other words, CEOs decided to let their equipment and assets rust away rather than pay for maintenance, let alone replacement.
To escape this malaise, we need to persuade those in corner offices to spend, build and hire. There is also a case to be made for the government, which can borrow at negative inflation-adjusted interest rates right now, to raise capital to remedy the nation's deficient infrastructure, its underperforming educational system and its inefficient health care system.
I'll cover these issues in my column next week.
For now, with growth unacceptably slow and joblessness rising again, global central banks are adopting a more aggressive easing bias as they seek to keep inflation high to ease the pain of deleveraging. That means low interest rates and other economic stimulus.
For weeks, I've been recommending to my newsletter subscribers and readers to focus on precious metals and the related mining stocks in preparation, because inflation tends to move them higher.
This means stocks like First Majestic Silver (AG), which is up nearly 9% since I added it to my Edge Letter Sample Portfolio on July 25. Or the VelocityShares 3x Long Silver (USLV), which is also up nearly 9%.
If we're headed for five more years of this mess, these types of positions are poised for another dramatic upswing.
At the time of publication, Anthony Mirhaydari did not own or control shares of any company or fund mentioned in this column. He has recommended First Majestic Silver and VelocityShares 3x Long Silver to his newsletter subscribers.
Be sure to check out Anthony's new money management service, Mirhaydari Capital Management, and his investment newsletter, the Edge. A free, two-week trial subscription to the newsletter has been extended to MSN Money readers. Click here to sign up. Mirhaydari can be contacted at email@example.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
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Maybe Congress should be allowed to elect 535 more persons to its 1% ranks, then we can really have a cluster of worthless a-holes running around Washington. The Congressional dining room would be busy...!
What do these elected officials really do ALL day? Since Congress has been at a stalemate for the past +3 years they must be out shopping, vacationing, golfing, sleeping with interns, etc. The story about Harry Reid preaching about the 'Mitt Romney, and I have a secret to tell' was in the Congressional Chamber and it was nearly EMPTY. Where were all OUR elected officials...taking a crap at the same time? I think ALL US citizen need accountability from these people, and we need to DEMAND it.
And how about spending on some US made goods?
Until the American people make major decisions about the debt, taxes, government spending, energy policy, inflation, free trade, regulations, this economy is going no where. Where is the leadership to do this? Economists are a joke, congress is the enemy, and the president is a lost dog in tall grass. If we vote them all out will anything change? Do the American people have the intelligent, the moral structure and the guts to make the necessary decisions????
A very good article. And why shouldn't people act in their own self interest. Politicians have such little interest or regard for the the people in the trenches' . I can remember my Mother saying in the mid 30's, Charity begins at home. No wonder she never have monies to a politician.
There will be growth in the spring, but only if you weed and fertilize in fall and winter. We fertilized plenty (TARP,QE1,QE2,soon QE3), but we did not weed the Garden.
The “To big to fail” syndrome has stifled any significant new growth. Just think how many new and hungry business could have been created if we had just pruned the Garden.
This insight brought to you by my Gardner,-Chauncey
I'll try. Currency requires a check and balance. There is X units outstanding and they have Y value based on Z much national productivity. Essentially, any nation can print as much currency as it wants, but the validity of it demands the nation also produces some output that is valuable to the rest of the world to substantiate that validity. America was very vital when it manufactured and because production was limited to human capacity for output, the Dollar was quite valid. We knew that, but we based our Dollar's value on Gold as a standard and so other nations did- who didn't have equivalence in validity by tangible output. So... we made cars, Germany made cars, Japan made cars, but most of that output sold in America, so the market for cars was here and not global. If there was uniform sales worldwide of all cars, the most popular would bolster that nation's money. That money would be paid to employees making those cars and lift the macro economy through common prosperity. We had that one time. The formula is fairly simple-- employ everyone, pay fairly and avoid spikes. It didn't happen that way. Administrative management contaminated the workforce in the early 1980s (college degrees entering in the middle not at the bottom). In order to substantiate existence, they downsized big businesses, increased paper roles and fought labor organizations- later not fighting them at all but retaining law firms to do it. All of that was wrong. If sustained labor costs were hurting the bottom line (not, the cost of admin was), the ideal solution was to infuse higher education and a cap term in labor roles. Because we went down the wrong road, we created monsters out of iconic brands that no longer resemble what made them great. There are less than a million manufacturing jobs left in America and we don't make anything from sratch. We lack skilled labor at all levels of infrastructure management and integrity (like plumbers, tool & die makers, etc.) and rely on foreign made that cannot be repaired (creating a replacement reliance). Our productivity has reduced to paper, imported parts and devices... we don't even grow enough food to sustain us. Our highest pay jobs do nothing for the good or integrity of the nation. More than 60% of us are now poor, impoverished, over-worked & under-paid or capable but idle. These conditions MUST be changed to survive. An "Inflationist" controls some level of business and has enough wealth to do two things-- alter the prosperity and buy the debt vehicles created to restore the prosperity. Throughout History, such people scuttle us, buy up these instruments (even though they caused the instability) and then profit from the recovery AND the interest on the instruments! Today, 99% of our big businesses do mainly financial wrangling for profit, they don't employ their own customers or filter profits back into the economy. We have too much administrative and paper business types (bankers, financiers, insurers, lawyers, accountants, politicians, services and service supporters) and not enough family sustaining jobs. If we did, we would have no housing issues- automatically. All global issues will resolve when we collapse phony paper, including fiat money. There was $50-60 Trillion in currencies globally some 15 years ago. It's close to $1 quadrillion now- including debt notes. There is also no nation with less than 25% out-of or barely working classes. We don't need any Trillionaires, we need far fewer Billionaires and we need a cap on compensation for all hired-in personnel- which includes management. We're dying from inherited money and power, a natural progression from an extended period of prosperity. We have to adjust that condition before recovery.
How come no one talks about the relationship between rising student loan debt and the faltering of the economy? Combine that with the retiring of the baby boomers and plain and simple no one is spending any money. I don't know the specific percentage of economic spending that the baby boomers were responsible for in the past but as they retire they will be saving thier money and spending at a much lower rate. Also the 40-60 year old bracket is still stuck supporting supporting the kids who cant find a job and move back home. As for the students who graduate with 50k-100k in debt, if they are lucky enough to find a job all of the money goes to paying off the loans which can take 10-30years. The money does not go to buying a house or spending on gadgets and driving the economy. Like it did with the baby boomers who actually drove our economy. So there is no old money and there is no new money being spent. 5 year recovery? Let's get real hear it is pobably going to be a lot longer. Student loan debt is going to kill the econmy especially when your investment does not pay off and you cant get a job.
PROLONGS THE PAIN,,,,,yes....but in the long run makes it a more healthy and sustainable economy. I don't want the banks to make any money off me....paying interest is being a slave to the banks and I will not have it. I have paid off most of my debt in the last 6 years. I have about 40k left on my house is all. I am happier than ever. and once I get my house paid off....what a relief. My wife and i have started saving 25% of our money for retirement, plus have a emergency fund, both of us have an old time pension...we live well and we don't pay the banks or other lenders anything. we have one credit card for travel and we pay it off each month. All 3 of my kids went through school with only 15k in loans which is now paid off, we cashed flowed the rest.
I don't live in a 400k house like most people do who make the type of money (175K) my wife and i do...but It is a nice enough place has what we want and we can travel anywhere we want because we have the CASH to do.
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