Transcript What`s Wrong (And Right) With This Recovery

What’s Wrong (And Right)
With This Recovery
HPVA Spring Convention
May 25, 2010
I.
What Kind of Recovery?
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Relatively weak GDP rebound
A jobless recovery
A lopsided upturn
Only partly transformative
Inorganic and not yet sustainable
The recovery policy gave us
II. More Headwinds than Tailwinds
III. Questions for Discussion
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Relatively Weak GDP Rebound
Deep drop, weak
rebound.
Real Quarterly GDP Growth
Annualized Rate, From the Beginning of the Recession
12
10
Balance-sheet-led
recession (not a
business cycle
recession).
8
6
4
2
0
-2
-4
Growth at 2.2%, 5.6%,
and 3.2%.
-6
-8
1973
1981
1990
2001
2008
Source: Bureau of Economic Analysis
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A Jobless Recovery
The jobless recovery the worst
yet.
Civilian Employment
Relative to Employment at the Beginning of the
Recession
1.06
1.04
+ 290,000 jobs in April.
1.02
1
But, U-6 rose to 17.1%.
0.98
0.96
Jobs deficit 12.8
million.
0.94
1
5
9
13
17
21
25
29
33
37
41
Months Since Beginning of Recession
1973
1981
1990
2001
Current
Source: Bureau of Labor Statistics
3
A Jobless Recovery:
A Pattern of Missing Jobs Continues
Technologically
advanced industries
disappoint.
High-Tech Job Losses and Gains
1998-2008
All Leading-Edge Industries
Other Information Services
Internet Publishing & Web…
Info Syst. design & related
Projected 2.8 million new
jobs (1998 to 2008). But
68,000 jobs lost.
Data Processing
Job Losses
Job Gains
Software
Infotech Services
Scientific Research
Pharmaceuticals
Medical Equip. & Supp.
Health, ed, gov.
Electronic Instruments
Instruments
Aerospace
Communications
Infotech Hardware
-600
-400
Source: Bureau of Labor Statistics
-200
0
200
400
600
Thousands
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A Lopsided Recovery:
Equity Rebound, Housing Slump
Equity market recovery,
housing price slump.
Housing and Equity Prices
130%
120%
Impact on middle-income
households.
110%
100%
90%
80%
More housing woes.
70%
60%
50%
40%
2006
2007
2009
2008
Case-Shiller
2010
S&P 500
Source: Standard and Poor's
5
A Lopsided Recovery:
Surging Profits, Stagnant Wages
Corporate profit rebound,
job and wage growth
anemic.
Corporate profits + 30.6%
Average Hourly Earnings
Year-Over-Year Percent Change
5%
4%
3%
Nominal wage growth +1.6%
2%
1%
0%
2007
2008
2009
2010
Source: Bureau of Labor Statistics
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A Lopsided Recovery:
The Return of Plutonomy?
High end recovery.
While stagnant wages
and housing prices
hurt moderate- and
low-income.
Return of Plutonomy
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Partly Transformative (Positive):
Rapid Productivity Growth
Productivity growth
increases growth
potential.
Productivity
Average Annual Change 1973-2009
3.5
2.9%
3
Also explains job loss.
2.5
2.1%
2
1.5
Productivity increased
6.3%.
2.6%
1.4%
1.1%
1
0.5
0
1973-1979 1979-1990 1990-2000 2000-2007 2007-2009
Source: Bureau of Labor Statistics
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Partly Transformative (Positive):
CapEx and Industrial Production
Capital spending on
equipment +13.4%
CapEx Spending on Equipment
and Software
Annualized Percent Change
30%
20%
10%
2010-I
2009-IV
2009-III
2009-II
2009-I
2008-IV
2008-III
2008-II
2008-I
2007-IV
2007-III
-10%
2007-II
0%
2007-I
Industrial production
+ 5.2%
-20%
-30%
-40%
Source: Bureau of Economic Analysis
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Partly Transformative (Negative):
Too Dependent on Consumer Spending
Consumer spending 71% of
GDP.
Personal Consumption as a Share of GDP
72%
71%
In Q1 2010, consumer spending
was 2.6% of the 3.2% increase
in GDP.
70%
69%
68%
67%
Spending boosted by tax cuts,
consumer rebates, and
government transfer payments.
66%
65%
64%
63%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Source: Bureau of Economic Analysis
10
Partly Transformative (Negative):
Too Dependent on Financial Profits
Financial sector profits are
soaring
Financial Sector Profits
As a Percent of Domestic Industry Profits
50%
45%
40%
Account for 35.7% of all
domestic corporate profits.
35%
30%
25%
Financial sector profits are
driven by trading revenue.
20%
15%
10%
5%
0%
50 55 60 65 70 75 80 85 90 95 00 05 10
19 19 19 19 19 19 19 19 19 19 20 20 20
Source: Bureau of Economic Analysis
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Partly Transformative (Negative):
Personal Savings Falling, Again
Personal savings
on decline (2.7% in
March), enabling
greater
consumption.
Personal Savings Rate
16
14
12
10
But slows household
deleveraging and
extends adjustment
period.
8
6
4
2
0
1970
1975
1980
1985
Source: St. Louis Federal Reserve
1990
1995
2000
2005
2010
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Partly Transformative (Negative):
Importing Our Way to Prosperity
Trade Deficit
USD Billions
A recovery would benefit
from rising net exports.
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
$0
Net exports subtracted 0.6%
from GDP growth Q1 2010.
USD Billions
Dollar strength and slow growth
in export markets.
-$10
-$20
-$30
-$40
-$50
-$60
-$70
Source: US Census Bureau
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Inorganic and Not Yet Sustainable:
One-Off Inventory Gains
Inventory rebuild
contributed over half of
growth during the
recovery.
Contribution to Growth
of Real Final Sales
20
15
10
But, these are one off gains.
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Real final sales averaged only a
1.7% increase over the past
three quarters, normally 3.5%.
0
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
-5
-10
Source: Bureau of Economic Analysis
14
Inorganic and Not Yet Sustainable:
Consumer Spending is on Life Support
Spending supported by
transfer payments.
Excluding transfer payments,
personal income increased just
0.3% since the third quarter of
2009.
$9.8
Chained 2005 USD, Trillions
Transfer payments now make
up 1/5th of personal income.
Personal Income Excluding
Transfer Payments
$9.6
$9.4
$9.2
$9.0
$8.8
$8.6
$8.4
$8.2
$8.0
2004
2005
2006
2007
2008
2009
2010
Source: Bureau of Economic Analysis
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Policy Has Worked: The Recovery
Reflects Washington’s Policy Priorities
Gigantic monetary
reflation and Wall Street
bailout
Recovery of financial
assets and profits
Tax cuts, “cash for
clunkers,” and
unemployment insurance
(Temporary) support of
consumer spending
Modest infrastructure and
public works spending
Weak job creation and
stagnant wages
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II. More Headwinds Than Tailwinds
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The debt overhang
The phasing out of fiscal and monetary stimulus
State and local government fiscal crises
Continued housing woes
The euro crisis, the rising dollar, and a new
Asian export push
• Renewed world deflationary pressures
• Uncertain tax and regulatory environment
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The Debt Overhang
Credit Market Debt Outstanding
Household deleveraging
has just begun (cut just
$310 billion of credit).
As a Percent of GDP
140%
120%
100%
High debt constrains
spending.
80%
60%
40%
Household and financial
sector debt decline,
government debt rises.
20%
0%
1960
1970
Household
1980
1990
Government
2000
2010
Financial Sector
Source: Federal Reserve
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Fed Wind-Down
The Fed slashed interest
rates and increased its
balance sheet (to over $2.3
trillion dollars).
Federal Funds Rate
Monthly Average
7
6
5
The Fed recently ended asset
purchases.
4
3
2
And is preparing the market for
future rate increases.
1
0
2000
2002
2004
2006
2008
2010
Source: Federal Reserve
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Government Support Will Fade
Recovery Act Spending
Recovery Act half paid
out.
USD Billions
$350
$300
$288
$275
$250
After the stimulus peak this
summer, it will be a drag on
growth.
$200
$173
$97
$150
$100
$163
$102
$50
Government debt concerns
will make more stimulus
more difficult.
$224
$125
$127
$0
Tax Benefits
Contracts,
Entitlements
Grants, Loans
Funds Not Paid Out ($395 billion)
Funds Paid Out ($392 billion)
Source: Recovery.gov
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State and Local Government
Fiscal Crises
State and local
governments face budget
shortfalls.
States cut a net 5,000
employees from payrolls in
April.
20
10
*
20
11
*
20
09
$0
-$50
Billions
State and local governments
subtracted 0.5% from GDP last
quarter.
20
04
20
02
20
03
Estimated State Budget Shortfalls
-$100
-$150
-$200
-$250
*Estimated
Source: Center for Budget and Policy Priorities
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Continued Housing Woes
Distorted by policy:
• Homebuyer tax credit
• FED MBS purchases
• Low interest rates, mods
Case-Shiller Index
220
200
180
Case-Shiller shows declines.
Experts predict renewed
downward pressure with
shadow inventory coming
online.
160
140
120
100
2000
2002
2004
2006
2008
2010
Source: Standard and Poor's
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The Euro Crisis, the Rising Dollar, and
a New Asian Export Push
EU accounts for:
• 21% of U.S. goods exports
• 20% of China’s goods exports
Dollar/Euro Exchange Rate
1.70
1.60
1.50
EU slowdown, will reduce
demand for US goods, hurting
the manufacturing revival.
1.40
1.30
1.20
1.10
1.00
0.90
0.80
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
Asian economies “double down”
on exports (Japan and China).
Source: Federal Reserve, Bloomberg
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Renewed World Deflationary Pressures
Excess global overcapacity and deflation.
Lack of demand (EU impaired, China and Japan resorting to
exports).
Difficult for US to export its way to recovery.
US may be forced to absorb global capacity or face prolonged world
recession.
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Uncertainty Over Taxes and Regulation
Biggest problems (Empire State Manufacturing Survey):
• Employee benefit costs
• Taxes
• Government regulation
With uncertainty, outsourcing becomes a more attractive.
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III. Mendonca’s Questions about
the Economic Recovery
• To what degree is China’s stimulus going to create growth or will it create an asset
bubble?
• Can the global banking system absorb losses that may be coming in consumer
loans and commercial real estate?
• Is consumer deleveraging cyclical or structural?
• What is going to happen when the unprecedented levels of stimulus are wound
down? One third of the $2 trillion in worldwide fiscal stimulus came from the
United States. What happens in 2010 when federal stimulus is overcome by state
budget cuts?
Lenny Mendonca
Presentation, Bernard L. Schwartz Symposium, The Jobs Deficit
October 20, 2009
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III. More Questions for Discussion
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If the economy slides back into recession, do we have room for a new
fiscal recovery program?
Can the European Central Bank and the Federal Reserve find ways to
monetize the debt and reduce the debt overhang to avoid deflation
without calling into question the fiat currency reserve system?
Can public infrastructure investment help transform the economy by
creating jobs, crowding in private investment, and enhancing America’s
productive capacity?
Can China and other high-savings, high-investment economies help
rebalance the global economy by accelerating the improvement of their
peoples’ living standards and by relying more on personal and social
consumption?
How can we revitalize our innovative capacity, especially in the critical
areas of energy, life sciences, and biotechnology in an era of
constrained government spending?
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