Economics is Broken, is the U.S. Economy as Well?
Megan GreeneSenior Fellow, Mossavar-Rahmani Center for
Business and GovernmentHarvard Kennedy School
Overview• US Cyclical Overview (Is the US Economy Broken?)
• Global Cyclical Backdrop
• Structural Quagmires (Economics is Broken)
US Cyclical Overview (Is the US Economy Broken?)
US Retail Sales Holding Up
US Retail Sales (% change, yoy)
Source: US Census Bureau, Bloomberg.
Headline vs. Core
Consumer Confidence Robust
Consumer Confidence
University of Michigan vs. Conference BoardSource: University of Michigan, Conference Board, Bloomberg.
US Housing Market a Bright Spot
Source: Pantheon Macro.
US Housing Market
Manufacturing WeaknessISM Survey
Manufacturing vs. Non-ManufacturingSource: ISM, Bloomberg.
Business Confidence Down
Source: NFIB, Bloomberg.
Business Confidence
NFIB (rhs) vs. CEO confidence (lhs)
CoronavirusJurisdictions with cases confirmed (as of Mar 5, 2020)
Source: Bloomberg.
Coronavirus Impact
Coronavirus Supply Shortages
Supply Problems Demand Problems?Inflation Expectations Have Plunged
Source: Bloomberg.
Financial Conditions Have Spiked
Source: Bloomberg.
Central Banks to the RescueG7 + Australia Policy Stance
Source: Bloomberg.
Fiscal PolicySpend, or Save? In 2001 and 2008, Tax Rebates Were Saved
Source: Bloomberg.
Global Cyclical Backdrop
China Slowdown
Source: Bloomberg.
China Thermal Coal Usage
China Slowdown
Source: Bloomberg.
Chinese Official PMI
SARS Impact on Chinese Retail Sales
Retail Sales, % change (yoy)
Source: Bloomberg.
Chines Authorities Stepping on the GasPBoC Rates
Source: Bloomberg.
Reserve Ratio, Deposit Rate
Japan Contracts
Source: Economic and Social Research Institute, Cabinet Office.
Japan real GDP, % change qoq, annualized
Major EZ economies weakened in Q4
Source: Pantheon Macroeconomics.
EZ Real GDP growth, % change qoq
EZ Industrial Production Falling
-5
-4
-3
-2
-1
0
1
2
3
4
5
Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19
Source: Eurostat.
EZ Industrial Production, % change yoy
PMI Also ContractingEZ Manufacturing PMI
Source: IHS Markit.
German Business Confidence Plunges
Source: ZEW, Bloomberg.
ZEW Indicator of Economic Sentiment
Structural Quagmires (Economics is Broken)
Don’t Be Fooled by the Stock MarketUnited States: S&P 500 and Real GDP Growth Correlation (%)
Source: BEA, Bloomberg, Rosenberg Research.
38%
30%
70%
7%
0%
10%
20%
30%
40%
50%
60%
70%
80%
1950-1959 1970-1989 1990-2009 2010-2019
Trade: Tariffs are “working”US trade deficit with China ($m)
Source: Bloomberg.
Trade: Tariffs are “working”US Exports to China ($m)
Source: Bloomberg.
Trade: Who’s Next?US Bilateral Trade Deficit ($bn)
Source: US Census Bureau.
Debt: So Much For Deleveraging
0
50
100
150
200
250
300
2001 2007 2019
Global Debt Global GDP
Global Debt Outpaced Income 5x This Cycle ($trn)
Source: IIF, IMF, Rosenberg Research.
Debt: Who Will Buy US Treasuries?Holdings of US Treasuries ($bn)
Federal Reserve, China, JapanSource: US Treasury Department, Bloomberg.
- 11/20/13, PBoC: “No longer in China’s favor to boost record FX reserves”
- US Treasury supply skyrocketed
- FX hedging makes foreign ownership of US Treasuries expensive
- All Hail the safe haven!
- So far, no crowding out
Risk of Falling AngelsRoughly Half of US Corporate Bonds are Rated Baa or BBB
Source: Bloomberg.
Low Growth, Low Inflation, Low Rates
Lower For Longer (% change, yoy and 10y yield)
Source: BEA, BLS, Bloomberg.
Inflation Peaks Ever Lower
2.7
6.26.6
1212.4
5.3 5.2
2.92.4
0
2
4
6
8
10
12
14
Oct '59 Dec '69 Dec '70 Jan '80 Jul '80 Nov '82 Mar '91 Sep '06 Aug '19
Inflation Peaks (% change, yoy)
Source: BLS, Rosenberg Research.
Wage Inflation Just As LacklustrePhillips Curve: The Theory vs. Reality
Source: BLS.
Demand Side Problem: Secular StagnationSavings > Investment interest rates pushed down
Source: Policonomics.
Inequality Contributes to Savings Glut
0.38
0.4
0.42
0.44
0.46
0.48
0.5
6.0
8.0
10.0
12.0
14.0
16.0
CBO PSZ AS
Gini Coefficient of Income Inequality Income Share of Top 1%
Source: US Census Bureau. Source: CBO, World Inequality Database, Auten-Splinter Online Appendix.
Supply Side Problem: Weak Productivity
Low Capex, Low Productivity Growth
Source: Pantheon Macro.
Tech Just Isn’t There Yet
Source: The Dogington Post.
Climate Change
Source: Global Carbon Project, Our World in Data, Financial Times.
Who Will Come to the Rescue?
Source: NBER, BEA, Bloomberg, Rosenberg Research.
There Are Solutions- Cyclical Picture Looks “Meh”
- Structural Challenges are Formidable
- BUT there are (FISCAL) policies that address many of these challenges:
- Progressive tax system to help compensate the losers- Productive Public Investment- Education and Skills Retooling- Research & Development- Retool the economy so it is more climate friendly
- The problem is POLITICIANS. The payoff on these policies may not happen within an electoral cycle.
Implications for Retirement Savings- Recession risk in the U.S. has increased in the past month
- Continue to invest defensively—utilities, healthcare, internet, education
- Sequence risk has risen
- The US looks like the cleanest shirt in the laundry basket- China, Japan, Europe and Emerging Markets showing
more weakness than the U.S.
- “Lower for longer” will persist, with growth, inflation and rates remaining muted across the developed world. This generally makes fixed income challenging and is supportive for equities
Thank you!
Megan GreeneSenior Fellow, Mossaver-Rahmani Center for
Business and GovernmentHarvard Kennedy School
@economistmeghttps://www.ft.com/megan-greene