September 10 2010: No economic growth for years to come
A quick bite somewhere in Nebraska
Ilargi: There is no shortage of analysts and experts out there who see and recognize some part of what’s ailing our economies. There is, however, a huge shortage of those who can connect the parts. Often the American people themselves look to be better judges of reality than all those who make a good living telling them what that reality is.
Still, Ian Bremmer & Nouriel Roubini start out promising enough:
Paradise Lost: Why Fallen Markets Will Never Be the Same
Crises breed denial. Whether a crisis concerns an individual’s health, career or marriage, a company’s reputation or market share, or a nation’s place in the global pecking order, powerful incentives exist within the stricken entity to aspire to a return to normalcy - and to proceed as if that result represents the only option. However, as we all know from human experience, some setbacks are irreversible. We believe the recent meltdown suffered by the U.S. and its partners on the liberal side of the global economy is one of them.
Still, many policymakers and economic thinkers in the U.S., Europe and Japan remain shrouded in denial. They assume that after a period of healing, high growth will return and the rules of global capitalism will restore the preeminence of the U.S. economy and the appeal of a chastened (yet only slightly less freewheeling) laissez-faire Anglo-Saxon model.
Such thinking is either dangerously naive or the result of epistemological blindness. A scenario can be charted in which the U.S. and its liberal market adherents not only return to precrisis "potential growth" but even exceed it. But the political, economic, financial and psychological hurdles standing in the way of this scenario suggest it would require divine intervention to make it so. [..]
After a few more years of lackluster growth — unavoidable due to the deleveraging needs of households and the business sector — financial institutions and governments will seek a return to growth and even demand that national governments move, or move out of the way, to increase it. This will be a dangerous moment — one that war correspondents refer to as "survivor’s euphoria." The illusion, of course, is of invulnerability, and too often lessons learned in previous brushes with mortality are cast aside.
Ilargi: "A scenario in which the U.S. not only returns to precrisis "potential growth" but even exceeds it"? If you have enough fantasy, well, perhaps. But what about all the other scenarios, why not talk about those? Roubini's problem is he can't shake off the notion of growth, in this case posing as "lackluster growth". And everything he says, and presumably thinks, falls in that light. Maybe he’s so happy to be invited and celebrated everywhere in the world as Dr. Doom that he doesn't want to take the risk of scaring his benefactors away. "Doom" thus comes to mean low growth, while flat-out contraction is off the agenda.
But how realistic is that? Even allowing for the fact that the GDP is "not a very accurate" way to measure growth, it's already "officially" at 1.6% and heading down short term (a correction to 1.2% is in the works). So what are the short to mid-term prospects? Well, 70% of GDP is the American consumer, so there's where to look. The 91-day trailing Growth Index of the Consumer Metrics Institute has gone all the way down to -5.79%, while official GDP remains at 1.6% for the moment. That’s a difference of 7.39% that will have to be explained away somehow.
10 days ago, when I last discussed the CMI Growth Index in One more time: GDP and CMI, it was at -5.43%. It is therefore sinking at roughly 1% per month. And this, don't forget, is a leading indicator, for which I devised the following graph back then, based on Doug Short's great work:
No matter where you stand, that graph provides at the very least a very stark warning. Then again, it’s just a graph, and perhaps somewhat crudely juxtaposed at that.
What will actually drive the real US economy, 70% of which is driven by consumers, forward? The latest report from Comstock Partners lifts part of the veil:
The Significance of Consumer Deleveraging
Consumers have only begun to cut back on their severe debt burdens, and the process will take a number of years. Household debt relative to GDP soared from a range of 43% to 49% in the 20-year period between 1965 and 1985 to a peak of 97.3% in 2009. As of March 31st (the latest data point) this dropped only slightly to 92.7%. To provide some more perspective, Ned Davis Research estimates the mean to be 54.2% over the past 58 years. The percentage climbed gradually to 65% in 1998, and then really accelerated to its recent peak.
To be conservative, let's assume that the household debt/GDP ratio falls back only to the 65% level of 1998 rather than to the lower level between 1965 and 1985 or to the long-term mean. Under that assumption household debt would have to be pared back by about $ 4 trillion (from the present total of $13.5 trillion), an amount that constitutes about 40% of current consumer expenditures.[..]
.... last week the ECRI Weekly Leading Indicator was down 4.11% from a year earlier. We searched the historical data to determine what happened to the economy at other times when the index was down 4.11% or more year-over-year. Over the last 42 years this has occurred seven times, and in all seven instances a recession started shortly before or shortly after the signal. We also note that all of these instances were accompanied by bear markets in stocks. Although no indicator is certain in economics or stock markets, seven for seven is nothing to sneeze at.
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