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What’s Wrong (And Right) With This Recovery HPVA Spring Convention May 25, 2010
What’s Wrong (And Right) With This Recovery
HPVA Spring ConventionMay 25, 2010
I. What Kind of Recovery?• 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 TailwindsIII. Questions for Discussion
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Relatively Weak GDP ReboundDeep drop, weak rebound.
Balance-sheet-led recession (not a business cycle recession).
Growth at 2.2%, 5.6%, and 3.2%.
Real Quarterly GDP Growth Annualized Rate, From the Beginning of the Recession
-8
-6
-4
-2
0
2
4
6
8
10
12
1973 1981 1990 2001 2008
Source: Bureau of Economic Analysis
3
A Jobless RecoveryThe jobless recovery the worst yet.
+ 290,000 jobs in April.
But, U-6 rose to 17.1%.
Jobs deficit 12.8 million.
Civilian Employment Relative to Employment at the Beginning of the
Recession
0.94
0.96
0.98
1
1.02
1.04
1.06
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
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A Jobless Recovery:A Pattern of Missing Jobs ContinuesTechnologically advanced industries disappoint.
Projected 2.8 million new jobs (1998 to 2008). But 68,000 jobs lost.
Health, ed, gov.
High-Tech Job Losses and Gains1998-2008
-600 -400 -200 0 200 400 600
Infotech HardwareCommunications
AerospaceInstruments
Electronic InstrumentsMedical Equip. & Supp.
PharmaceuticalsScientific Research
Infotech ServicesSoftware
Data ProcessingInfo Syst. design & related
Internet Publishing & Web…Other Information ServicesAll Leading-Edge Industries
Thousands
J ob Losses J ob Gains
Source: Bureau of Labor Statistics
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A Lopsided Recovery: Equity Rebound, Housing Slump
Equity market recovery, housing price slump.
Impact on middle-income households.
More housing woes.
Housing and Equity Prices
40%
50%
60%
70%
80%
90%
100%
110%
120%
130%
2006 2007 2008 2009 2010
Case-Shiller S&P 500
Source: Standard and Poor's
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A Lopsided Recovery: Surging Profits, Stagnant Wages
Corporate profit rebound, job and wage growth anemic.
Corporate profits + 30.6%
Nominal wage growth +1.6%
Average Hourly EarningsYear-Over-Year Percent Change
0%
1%
2%
3%
4%
5%
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.
Also explains job loss.
Productivity increased 6.3%.
ProductivityAverage Annual Change 1973-2009
2.9%2.6%
2.1%
1.4%1.1%
0
0.5
1
1.5
2
2.5
3
3.5
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%
Industrial production + 5.2%
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CapEx Spending on Equipment and Software
Annualized Percent Change
-40%
-30%
-20%
-10%
0%
10%
20%
30%
2007-I 2007-II 2007-III 2007-IV 2008-I 2008-II 2008-III 2008-IV
2009-I 2009-II 2009-III 2009-IV 2010-I
Source: Bureau of Economic Analysis
Partly Transformative (Negative): Too Dependent on Consumer Spending
Consumer spending 71% of GDP.
In Q1 2010, consumer spending was 2.6% of the 3.2% increase in GDP.
Spending boosted by tax cuts, consumer rebates, and government transfer payments.
Personal Consumption as a Share of GDP
63%
64%
65%
66%
67%
68%
69%
70%
71%
72%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Source: Bureau of Economic Analysis
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Partly Transformative (Negative): Too Dependent on Financial Profits
Financial sector profits are soaring
Account for 35.7% of all domestic corporate profits.
Financial sector profits are driven by trading revenue.
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Financial Sector Profits As a Percent of Domestic Industry Profits
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
1950195519601965197019751980198519901995200020052010
Source: Bureau of Economic Analysis
Partly Transformative (Negative):Personal Savings Falling, Again
Personal Savings Rate
0
2
4
6
8
10
12
14
16
1970 1975 1980 1985 1990 1995 2000 2005 2010Source: St. Louis Federal Reserve
Personal savings on decline (2.7% in March), enabling greater consumption.
But slows household deleveraging and extends adjustment period.
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Partly Transformative (Negative): Importing Our Way to Prosperity
A recovery would benefit from rising net exports.
Dollar strength and slow growth in export markets.
Net exports subtracted 0.6% from GDP growth Q1 2010.
Trade Deficit
USD Billions
-$70
-$60
-$50
-$40
-$30
-$20
-$10
$0Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10
USD Billions
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.
But, these are one off gains.
Real final sales averaged only a 1.7% increase over the past three quarters, normally 3.5%.
Contribution to Growth of Real Final Sales
-10
-5
0
5
10
15
20
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Source: Bureau of Economic Analysis
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Inorganic and Not Yet Sustainable:Consumer Spending is on Life Support
Spending supported by transfer payments.
Transfer payments now make up 1/5th of personal income.
Excluding transfer payments, personal income increased just 0.3% since the third quarter of 2009.
Personal Income Excluding Transfer Payments
$8.0
$8.2
$8.4
$8.6
$8.8
$9.0
$9.2
$9.4
$9.6
$9.8
2004 2005 2006 2007 2008 2009 2010
Chained 2005 USD, Trillions
Source: Bureau of Economic Analysis
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Policy Has Worked: The Recovery Reflects Washington’s Policy PrioritiesGigantic 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• 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 OverhangHousehold deleveraging has just begun (cut just $310 billion of credit).
High debt constrains spending.
Household and financial sector debt decline, government debt rises.
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Credit Market Debt OutstandingAs a Percent of GDP
0%
20%
40%
60%
80%
100%
120%
140%
1960 1970 1980 1990 2000 2010
Household Government Financial Sector
Source: Federal Reserve
Fed Wind-DownThe Fed slashed interest rates and increased its balance sheet (to over $2.3 trillion dollars).
The Fed recently ended asset purchases.
And is preparing the market for future rate increases.
Federal Funds RateMonthly Average
0
1
2
3
4
5
6
7
2000 2002 2004 2006 2008 2010
Source: Federal Reserve
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Government Support Will FadeRecovery Act half paid out.
After the stimulus peak this summer, it will be a drag on growth.
Government debt concerns will make more stimulus more difficult.
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Recovery Act SpendingUSD Billions
$163$102 $127
$125
$173 $97
$0
$50
$100
$150
$200
$250
$300
$350
Tax Benefits Contracts,Grants, Loans
Entitlements
Funds Not Paid Out ($395 billion)
Funds Paid Out ($392 billion)
Source: Recovery.gov
$288 $275
$224
State and Local Government Fiscal CrisesState and local governments face budget shortfalls.
State and local governments subtracted 0.5% from GDP last quarter.
States cut a net 5,000 employees from payrolls in April.
Estimated State Budget Shortfalls
-$250
-$200
-$150
-$100
-$50
$02002 2003 2004 2009 2010*2011*
Billions
*EstimatedSource: Center for Budget and Policy Priorities
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Continued Housing WoesDistorted by policy:• Homebuyer tax credit• FED MBS purchases• Low interest rates, mods
Case-Shiller shows declines.
Experts predict renewed downward pressure with shadow inventory coming online.
Case-Shiller Index
100
120
140
160
180
200
220
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 PushEU accounts for:• 21% of U.S. goods exports• 20% of China’s goods exports
EU slowdown, will reduce demand for US goods, hurting the manufacturing revival.
Asian economies “double down” on exports (Japan and China).
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Dollar/Euro Exchange Rate
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
1.70
199920002001200220032004200520062007200820092010
Source: Federal Reserve, Bloomberg
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 MendoncaPresentation, Bernard L. Schwartz Symposium, The Jobs Deficit
October 20, 2009
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III. More Questions for Discussion• 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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