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What’s Wrong (And Right) With This Recovery HPVA Spring Convention May 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 Tailwinds III. Questions for Discussion 1 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 2 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 4 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 6 A Lopsided Recovery: The Return of Plutonomy? High end recovery. While stagnant wages and housing prices hurt moderate- and low-income. Return of Plutonomy 7 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 8 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 9 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 11 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 12 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 13 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. 5 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 15 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 16 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 17 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 18 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 19 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 20 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 21 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 22 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 23 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. 24 Uncertainty Over Taxes and Regulation Biggest problems (Empire State Manufacturing Survey): • Employee benefit costs • Taxes • Government regulation With uncertainty, outsourcing becomes a more attractive. 25 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 26 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? 27