STATES OF USA RECOVERY?

Economic recovery is arriving in fits and starts – the starts are positive growth and the fits are restructuring including using fewer jobs to produce goods and services i.e. rapid productivity gain, also banks and borrowers deleveraging and continuing bouts of short-term profit taking and anxiety attacks. All that is said here about the USA, applies almost exactly to the UK as well, which is lagging 6 months behind the USA, which is the UK traditional response lag with a century of consistent history in support.
USA unemployment remains unacceptably high, hence President Obama’s new supplementary spending initiatives announced in his address to both houses of Congress in January to focus directly on job creation.
Real GDP, the broadest measure of total output, rose at a robust 5.7 % (annual rate) in Q4 2009 - best gain in 6 years. If sustained this would be a V-shaped upswing as in the last few recessions, in which case consumer and investment confidence would rapidly recover – but that is unlikely, not least because of the deeper and longer recession period of Q1’07 to Q2 ‘08 !
The Q4 ‘09 leap in GDP overstates the underlying bounce-back of the economy - much of it reflects slowdown in manufacturing businesses selling off inventory and a resort to more new production. Less than half of the Q4 growth reflected higher consumption - it only grew by 2.2%. Manufacturing and retail & distribution are getting inventories more closely aligned to short term sales, but such adjustments can only deliver a growth spurt only for a few quarters. The government’s deficit spending effects including shifts in composition to focus on job creation have to take up the slack. A sustained robust recovery will only be certain when realised sales to end-users and consumer are seen to grow at 4-6%.
Consumers and investors remain cautious. The big weight hanging over everyone’s heads is jobs security and the sight of construction projects at standstill – the cranes aren’t moving and recovery in property housing values and office occupancy rates are uncertain. Real estate market recovery will not be uniform but patchy by area, county and state. Shift in spending and demand will also see industries and services recover in a similarly patchy manner – not uniformly across the country except in those sectors that directly benefit from government deficit spending and which are relatively recession immune.
The current persistently high level of non-farm payroll unemployment is severely restraining income and undermining confidence as people worry whether they can be confident of their paychecks in the year ahead, and see some signs of new jobs, plus signs of easier credit. Even those with secure jobs worry about debt burdens that where close to historic highs at the onset of the financial crisis and wealth factors after equity and house prices fell sharply. Households are paying down debt and saving more, a development that partly reflects banks reluctant to lend to households and businesses as the banks restructure their balance sheets, making them smaller to reduce their own borrowing, the gap between loans and deposits.
The housing sector appears to have stabilized, but there remains a large overhang of empty housing and office properties held off the market. So, no continued sharp turnaround. New home sales and construction finally stopped declining in 2009 and appear stable, but at low levels. Home sales surged in late 2009 in temporary response to the Homebuyer Tax Credit - it expires this spring. The housing sector also benefits from the Fed’s buying of mortgage-backed securities, but the Fed is now tapering off these purchases and plans to stop them by end of March. The housing market could then weaken again.
In past recoveries, business investment typically grew rapidly once the economy turned up, but banks were in much better shape then to respond rapidly to the upturn. In this recession, businesses sharply curtailed capital investment. There is some rebound in business replacement spending on equipment and software. Businesses remain nervous and exceedingly cost conscious, focused on process efficiencies, core sales not new developments, keeping supply chains lean, waiting for purchase orders before they produce, and meeting increases in demand with higher productivity from existing workforces. Similar is true in services – there are always some sector exceptions. Generally, bank financing remains an impediment to fully-restored confidence. Credit is available, but collateral requirements are onerous. What’s more, the crisis made businesses keenly aware that they can’t count on being able to get credit.
Meanwhile, commercial real estate will stay depressed for some time yet with high vacancy rates for office, retail, warehouse, and other income-producing properties, despite lower rents, severely reducing demand for construction. Lenders and investors demanding extra compensation for risk, drove up commercial real estate financing rates compounded by banks anxiously and urgently reducing their exposure to property. The market for commercial mortgage-backed securities remains distressed, despite support from the Fed’s Term Asset-Backed Securities Loan Facility, or TALF.
Put it all together and you have a recipe for a moderate growth. Q1 2010 appears on course for around 3% annual rate GDP growth – perhaps 3½% for the year as a whole, maybe 4½% in 2011, with private demand and consumer spending tightening the slack as government stimulus programs fade.
Much depends on banking and financial systems recovering as asset values restore and much lower losses are realised and capital reserves are shored up by higher equity values. Second, losses on mortgages, commercial real estate credits, and other loans continue to arrive, and the full weight of foreclosures and bank failures on the economy has yet to be felt, but net interest income and asset sales should recover sufficiently to ensure rising profits. Monetary policy reached the limit of its stimulus and fiscal policy is facing political limits. Despite the high deficit spending ratios in government budgets it is not clear that these can give the same kick-start to a low-inflation economy as in past recoveries.
The “output gap,” the difference between the actual level of GDP and the level where GDP would be if the economy was at an optimum low-inflation near full employment was at minus 6% at end of 2009, based on Congressional Budget Office estimates - equivalent to $1 trillion of lost annual output, or roughly $3,000 per capita. This will continue. The San Francisco Fed estimated potential level of output grows roughly 2½% annually due to growth in the labor force and higher productivity. Hence, over the next two years, potential output will increase by about 5 %, and if real GDP grows 8% ( 3% more than potential output) then the output gap will shrink to around minus 3% by end of 2011 and that may not reduce to zero until 2013.
The U.S. economy shed 8.4 million jobs since December 2007, more than 6 % drop in payrolls, the largest such decline since the demobilization following World War II. Unemployment was 5 % at the start of the recession, rose to around 10 % in late 2009, 0.7% in January. New jobs are at very low levels. The pace of job losses has slowed dramatically and there may be a turnaround in the labour market soon.
The unemployment rate rose sharply last year, partly a delayed effect from loss of service sector jobs and the particular nature of a banking-crisis triggered recession.
GDP was basically unchanged over the four quarters of 2009. But payroll employment fell by 4 percent over the same period. In other words, the economy produced roughly the same output with 4 % fewer workers, a productivity growth well above the long-term trend. Is that a temporary aberration or a new trend? The government is very concerned not to have a repeat of the relatively-speaking jobless recovery of the early 1990s and early 2000s.