Global Growth Trends: The Shape of the Recovery

In the last year, many analysts and investors have focused on China as the driver for global economic recovery. More recently, investors have grown concerned that China is curtailing their purchases of commodities as their stimulus program wanes. One of the factors many investors miss is the underlying trends that are in place. One is the growing employment problem in the U.S. that is causing the shape of the U.S. recovery to be different than what has been normal. Another is the falling value of the U.S. dollar, a trend that will continue. The third trend is the continuous expansion of the emerging economies of Brazil, China, India, as well as other Asian countries such as Indonesia, Australia, and Vietnam. Today, we will cover the shape of the U.S. recovery.

Many analysts expect a V shaped recover in the U.S. as they expect the U.S. consumer to return to their former spending ways. Milton Friedman taught us that after a recession demand snaps back to its previous level as consumers return to their previous levels of spending. The late Milton Friedman showed that deep recessions experience strong recoveries. He compared the economy to a piece of string stretched taut on a board. The more forcefully the string is plucked, the more sharply it snaps back.

In this analogy, the piece of string represents spending by consumers, companies and the government, or economic demand. The rigid board symbolizes the supply side. A recession may cause demand to falter for a while, but it “snaps back” to its former level constrained by the supply side. Since people, capital, facilities, and equipment have been out of service during a recession, the economy can rebound reaching its previous level quickly. The problem comes when the resources lost during the recession are no longer viable during the recovery. Some of these people have lost their skills, equipment is no longer productive and has been scraped, and capital is lost at it went to pay down debt.

With its high level of unemployment, the U.S. has lost 7.2 million jobs since December 2007. Moreover, U-6 reached a new high of 17%. U-6 includes what the BLS calls “marginally attached workers”, those people who are working part-time but want full time work. By some measures, more than 26 million people are out of either work or working in part-time or under-employed jobs. People have cut their spending to match their new lower living standards. These lower spending levels flow though the economy as lower demand.

The longer people are out of work, they lose their skills, hurting their ability to return as productive members of the work force. In addition, a significant percent of the spending before the recession came from high levels of borrowing. The home ATM is no longer available to fund a higher level of spending. Households are striving to rebuild their retirement assets, which will take a number of years. They will be saving rather than spending. As a result, demand will not return to its former level as quickly as many expect. For example, Meredith Whitney, a well known analyst that has been on target, predicts a $2 trillion withdrawal of credit by 2010.

Once the recovery begins, where will the jobs come from? Many companies have been able to maintainer some of their profitability by ruthless cost cutting. Those that have been able to keep costs in line with lower revenues have been able to maintain some level of profitability that has surprised many. Moreover, many companies that have been able to reduce their employment levels will be looking to add new technology and processes to raise their productivity before they start to hire again.

Since demand will be slower to rise, many companies will be reluctant to hire. Rather they will try to get bay with their current staff levels spending money on productivity improvements. As a result, job growth will be slow to materialize. When they do hire, it will be for people with specialized skills in short supply. People without these skills will find work hard to come by. This will keep unemployment at uncomfortable high levels for years to come. High unemployment leads to lower GDP.

Rather than a V shaped recovery, we should be expecting one shaped like a U and perhaps a backwards J. People out of work without the necessary skills to meet the needs of business will act as an anchor on the U.S. economy. The way out of this problem comes from the other two trends that are underway, the falling value of the U.S. dollar and the strength of the emerging economies in Asia and South America. Unfortunately, these trends will take time to see the necessary affect on the U.S. economy.

In the next segment of this thought process I will briefly review why the value of the U.S. collar will keep falling and how this situation will affect sectors of the U.S. economy.

Comments

[tobi:]

I think America is heading for a similar problem Europe already has, maybe in less size because the lack of social support makes it a screaming necessitiy to work in the US: Structural unemployment meaning high overall unemployment while high skilled specialized labour in emerging "green" industries is in short supply, but one can't make a former constrution worker a biotech engineer. Politicians will be pressured to force down immigration of highly skilled labour, which was a main driving factor in the emerging of new productive companies such as Google, to these new growth industries because unemployment is still high, not realizing they kill emerging industries that way and making it even harder to for everybody to find employment.

Oct 07 08:48 AM

[LilBob:]

The jobs will come from those companies that manage to adapt to the changing buying habits of the new American consumer. It's really humiliating when you have to move in with family members and cut your personal spending to the bone just so you can keep up with things like student loan payments and car insurance. Individuals who've had those kinds of experiences aren't going to return to former spend-thrift patterns of living just to return themselves to the hounding of collections agents and the self-righteous brow-beatings of the more financially savvy. Those whose business models rely on spendthrift dolts for their financial survival will soon end up in the poorhouse themselves. (Perfect example, a recent article I saw used the phrase "quality is the new black," I'd say it's a pretty safe bet that people who use the phrase "quality is the new black" will soon be the new unemployed).

Consumption will never return to it's former levels. The notion of a "jobless V-shaped recovery" is idiotic. The only way this economy can ever hope to produce enough jobs to sustain itself is through some restoration of domestic production and a vibrant resurgence of entrepreneurs who create advances in energy conservation, medical technology and other fields without first whining to the government for billions of dollars in subsidies.

Oct 07 09:50 AM

[ryanclarke:]

It does appear the Euro nations, the Arabs, and the Asians are determined to break the back of the not so green currency called the dollar. I don't blame them, as Bernake disregards their input as to what the value of the currency and the debt valued in that currency .... should be.

Oct 08 12:09 AM