Stephen Roach: Beyond Another Dip?
Stephen Roach (New York)
The second double dip scare of 2002 now seems to be winding down. Just as the US economy came close to a recessionary relapse this past spring, it came equally close in the fall. But in both instances the economy didn’t quite get there. Real GDP growth in second quarter barely hovered in positive territory to the tune of +1.3%, and our latest estimate calls for about a 1% increase in the current period. Is that it for close calls on the double-dip watch? Or is the recent past prelude for more such scares ahead?
I will be the first to concede that there are, indeed, some encouraging signs in the recent data flow on the US economy. Relative to my own expectations, the biggest positive surprise has come from the high-frequency data in the labor market, where the weekly jobless claims have drifted well below the key 400,000 threshold over the past four weeks. For some time, I have been worried that a new round of corporate layoffs was about to unfold that would deal a harsh blow to the job- and income-security of the overextended American consumer. My fear was that the lack of pricing leverage for earnings-constrained US businesses would unleash a new wave of cost-cutting. Since most of the cost-cutting of the past couple years has been concentrated in capital (i.e., IT-led capital spending), I suspected that the pendulum of cost-cutting would swing to labor in the form of headcount reductions. To the extent that the latest figures on jobless claims refute that hypothesis, consumers might well avoid the biggest threat of all.
The financial markets have also gotten a lift from the backward-looking data flow. There was an upward revision to 3Q02 real GDP growth to 4.0% from 3.1%. At the same time, there was a 0.4% increase in October consumption versus a consensus estimate of +0.3%, and a 2.8% increase in durable goods orders in October versus a consensus estimate of +1.5%. With the exception of the reworking of the GDP, all of these signals took most forecasters and investors by surprise. Prepared for the worst, the outcome was hardly the dire sink-hole we double-dippers feared. And so the markets have once again been quick to conclude that an important inflection point must be at hand.
Far be it for me to throw any cold water on such euphoria, but it pays to put this data-rush in perspective. First of all, the jobless claims data do not signal a marked improvement in the tone of the US labor market – they only suggest that the bleeding may have been arrested for the time being. Continuing claims for unemployment insurance – new filers plus the stock of old filers – have remained elevated; largely for that reason, we see anemic job growth at best – consistent with our estimate of a paltry +25,000 increase in nonfarm payrolls for November (out this Friday 6 December). Secondly, the consumer is far from resuming a leadership role in driving the US economy. Even though the monthly consumption data surprised on the upside in October, real consumer spending for the month remained –0.9% (annualized) below the 3Q02 average. Building in a rebound for vehicle sales in November, along with modest gains in Holiday sales, we still look for real consumption to eke out only a 0.5% annualized increase in the current period. Thirdly, there’s nothing all that robust about business capital spending trends either. October’s shipments of nondefense capital goods – the core component of business equipment spending – remain –0.6% (annualized) below the 3Q02 average. While this translates into an increase in real terms, that’s only because of the deflation that government statisticians build into the GDP-based translation exercise for IT-dominated capital equipment. The resulting statistical increase in business capital spending stands in sharp contrast with the hard data on nominal expenditures in this sector.
Nor is there much ground for celebrating acceleration in economies overseas. Europe is a case in point. On the surface, the latest business surveys for Italy, France, and Germany all surprised on the upside in November. Those results, in conjunction with a likely easing by the European Central Bank at this week’s policy meeting, have fueled newfound optimism on prospects for the Euroland economy. Indeed, our own survey-based model of industrial production points to a sequential improvement of manufacturing activity in the current quarter. But as Eric Chaney notes, this is mainly traceable to the "base effect" of an easy comparison with depressed trends of a year ago (see his "A Step Up Doesn’t Make a Recovery"). Even in the face of the survey data, our Euro-zone team still looks for Euroland real GDP growth to slow to just +0.2% in 4Q02 and then hold in a +0.1% to +0.2% range in 1Q03 (all at quarterly rates). That’s tantamount to "stall speed" for the Euroland economy, putting the region right back on the brink of its own double dip. At the same time, the latest data flow in Japan is increasingly disconcerting. Recent trends in industrial production point to a contraction in the final quarter of CY02, the first such drop in four quarters. And the Japanese unemployment rate was just reported to have hit a new record high of 5.53% in October, putting further pressure on the nation’s reluctant consumers. In short, it’s hard to send the "all-clear" signal for recoveries elsewhere in the industrial world.
So where does this all leave us? In my humble opinion, not very far on the road to sustainable recovery in a US-centric global economy. Sure, America may have sidestepped another double-dip alert, but, in my view, there’s little reason to conclude that there won’t be further such scares in the months and quarters ahead. The lingering excesses of America’s post-bubble business cycle – especially a massive current-account deficit and record private sector debt loads – makes it hard for me to believe that there will be a vigorous response of the US economy to the latest dosage of policy stimulus. Just as policy traction has been elusive over the past couple of years, it should prove to be just as ineffective in overcoming structural headwinds over the next couple of years. Until the remaining excesses are purged, vigor should prove to be the exception not the rule. That leaves the US economy confined to a subpar growth mode – setting the stage for periodic bouts of weakness that could easily culminate in a double dip. Moreover, with foreign economies lacking in self-sustaining domestic demand, there appears to be no new global growth engine in sight. That also reinforces the dip-prone tendencies of this post-bubble business cycle.
Sure the data have taken a turn for the better. But we’ve been down this road before, only to get disappointed by the onset of yet another dip alert. I see little reason to believe that this vicious circle has suddenly turned virtuous. Financial markets betting once again on the end of the "dip-trade" could be in for a rude awakening. |
