Stephen Roach on : "So Where’s the Dip ?"
(From :
morganstanley.com ).
Mar 01, 2002
Global: So Where’s the Dip?
Stephen Roach (New York)
I get asked that question a lot these days -- by clients, colleagues,
friends, and even my family. Last weekend, while watching the Olympics
on television, my wife leaned over and asked me about the dip. I
thought she was talking about a skater, but, no, it was the economy,
stupid. And with the latest numbers all flashing recovery, the questions
are coming at a fast and furious pace. The next dip is starting to seem
more elusive than ever.
Yet that’s precisely the context that always gives rise to a double dip --
a seemingly spontaneous revival in the economy that just doesn’t stick.
That’s the way it has played out in five of the past six recessions, and
that’s what I still think is in the cards for the US economy. The other
day, my good friend Ed Hyman of ISI noted that double dips have
never occurred in an economic recovery. Hard to argue with that. After
all, that’s what recoveries are all about -- a sustained rebound after a
recession has run its course. The key word is "after." That raises the
basic question -- whether, in fact, recovery actually has commenced or
not. If the jury is still out on economic recovery, as I suspect it is, it’s
hard to say never about anything -- especially the well-established
historical tendency for the economy to experience a relapse.
But this debate isn’t about history. It’s about the future staying power
of this expansion in 2002. In that vein, I am hard-pressed to believe
that the post-bubble US economy is capable of sustaining a meaningful
recovery. A confluence of imbalances -- record debt loads, deminimus
saving, excess capacity, and a massive current-account deficit --
underscores a lingering fragility that leaves the economy highly
vulnerable to a setback. I am in complete agreement with Barton Biggs
on this key point: Just as the downside of the current business cycle is
unlike any of those of the recent past, so the upside should be equally
distinctive. Sure, there has been plenty of classic counter-cyclical
stimulus -- massive monetary easing, some tax cuts, and lower energy
prices. Just because this medicine has worked in the past doesn’t mean
it will work this time.
It all comes back to the unique character of this business cycle. And this
one turns the typical cycle on its head -- underscoring exactly why it
makes little or no sense to frame predictions of the future solely on the
basis of extrapolations from the past. For example, over the 28
quarters of the past six recessions, housing and consumer durables,
combined, lowered annualized real GDP growth by an average of 1.2
percentage points per quarter; by contrast, in the final three quarters of
2001, these same two sectors actually boosted GDP growth by 1.2
percentage points per quarter. There’s no dark secret as to the unique
source of the current recession -- business capital spending. Unusually
sharp declines in this sector lowered annualized real GDP growth by 1.6
percentage points per quarter over the final three periods of 2001 --
literally four times the average reduction of 0.4 percentage point that
occurred in the 28 quarters of the past six recessions.
That raises the basic question: What’s going to spark economic
recovery? The sectors that normally lead the US out of recession --
housing and consumer durables -- have already done their heavy
lifting. The problem is that such support came during the recession -- in
sharp contrast to the steady declines that have occurred in recessions of
the past. Apart from the well-advertised upside of the inventory cycle,
there’s not much else in the pipeline. I am hard-pressed to believe that
the overly indulgent, yet debt- and saving-constrained, American
consumer is up to the task. Nor do I sense that a now chastened
Corporate America will return to the go-go days of open-ended capacity
expansion. And you can forget about export support in a sluggish
global economy, especially with a strong dollar. Consequently,
notwithstanding all the so-called stimulus that has been put in place, I
am hard-pressed to identify the true spark to the coming economic
recovery in the United States.
When all is said and done, I still look for a relapse this spring. The
hints of what’s to come are already in the numbers. Take the sharp
gains of personal consumption in 4Q01 -- just revised up to 6.0% (from
5.4%). Never before have consumers spent with such reckless abandon
during a recession; in the 28 quarters of the past six recessions
consumer demand rose, on average, at just a +0.5% annual rate.
Moreover, fully 86% of last quarter’s consumption burst is traceable to a
39% annualized spike in the durable goods category -- mainly
big-ticket items such as motor vehicles, furniture, and appliances that
are purchased infrequently. To the extent that such spending was
compressed into the final period of last year by some extraordinary
post-September 11 price incentives, there is good reason to believe
that the sales borrowed from gains that would have otherwise occurred
in early 2002. I remain confident that such a payback will be a key
feature of the coming relapse.
The same can be said for the great American housing boom. The
markets were staggered by January’s 16% surge in sales of existing
homes to a new all-time record. But they shouldn’t have been. Mother
Nature did the trick -- the last few months have witnessed the warmest
nationwide temperatures in 105 years. It turns out that actual housing
resales fell 17% last month (from 404,000 in December 2001 to
336,000 in January 2002). Since the heat wave limited the downside,
the hocus-pocus of seasonal adjustment produced an extraordinary
spike. But what the statisticians giveth, they must taketh -- the
so-called seasonal factors always average out over the course of the
year. All it takes is for the weather to return to normal -- and the
seasonally-adjusted figures will fall like a stone. I reckon that will also
occur this spring -- right in the heart of the relapse season.
Meanwhile, Corporate America is starting to take the classic bait of the
double dip -- lifting production just when the demand relapse might be
at hand. General Motors’ recent announcement to boost 1Q02 North
American production plans by 20,000 vehicles is a case in point, in my
view. So, too, is GM’s just-unveiled lease-waiver program -- allowing
those whose leases are expiring over the next six months to forego
their final payments, provided they sign up for a new car or truck. I
believe Detroit is flaunting the perils of the business cycle -- banking on
sustained vigor in demand at precisely the moment when the payback
effect from the recent sales spike could well be in the offing. To the
extent that GM’s optimism starts to spread to other segments of the
business community -- and several of our analysts suggest that may
now be happening -- I would expect the macro repercussions of a
demand relapse to be all the more significant.
The case for the double-dip remains quite compelling, in my view. Yes,
most of the numbers have broken the other way. The bulk of the
forecasting community is lined up on the other side of the boat. A
once-cautious business community is starting to sniff recovery. And the
headlines scream, "Recession is Over!" It’s always that way at a false
dawn.
© 2002 Morgan Stanley |
