David A. Rosenberg an economist with Clusken Sheff in Canada, has likened the world economy to that of a car being driven by a drunk – that is the car is moving back and across the centre line just missing the ditches on the side of the road. Currently he sees the car in the middle of the road although he questions as to whether this is due to the driver becoming more sober or steering towards the ditch on the other side.
Recently the US stock market (Dow Jones Industrial Average) went above 14000 for the first time in more than five years for the following reasons:
1. Better job figures – employers added 157,000 jobs in January and hired more workers in 2012 than had previously been thought. See chart below.
2. Corporate earnings have been stronger than expected,
3. US Federal Reserve has indicated that it will keep interest rates at near zero levels as well as continuing their policy of monthly $85 billion purchases of bonds and mortgage-backed securities, which injected $3 trillion into the banking system last week.
This third point is particularly important. In the New York Times, Rosenbery stated that he didn’t see the US economy in a recession as yet but could quickly go in that direction. “Anemic growth is my baseline scenario.” Also how long can the US Fed keep propping up equity markets and pumping money into the system? The conditions in Europe are not much better – unemployment rose to record levels in December last year and currently stands at 26.8% in Greece and 26.1% in Spain. Add to that the austerity measures which have impacted greatly on overall aggregate demand and the consumer slowdown in Germany, the eurozone area has its problems. So the car might be in the middle of the road right now but it might not take too much for it to deviate from a safe path.
Below is a graphic showing the levels of unemployment for each month since 1948 and if the economy during that time was in a recession (square in cell). Some points of note:
*In 1953 the level of unemployment was between 2-3% but the US economy was in a recession for the latter part of the year
*The majority of 1960 saw recessionary conditions with unemployment around 6-7%
*1974-75 the economy experienced stagflation – high unemployment and high inflation
*1980-83 periods of high unemployment – the early Reagan years and free market policies.
*1998-2001 – very low levels of unemployment followed by the impact of the 9/11 attacks and the recession that followed
*The financial crisis of 2008 saw 19 consecutive months of recession and unemployment reached between 10-11% in 2009. Since then it has been above 7%.
James Surowiecki of The New Yorker recently looked at the so-called rebound of the US economy. In February this year 200,000 new jobs were created and real incomes were growing also. Other indicators have been positive, for instance new car purchases have increased and the their are signs that aggregate demand is going up. But this demand is not necessarily coming from higher incomes from greater hours worked but the increasing number of young adult Americans living at home – see graph. This means that they have more income to spend on other items rather than rent/mortgage etc. In the article Surowiecki mentions data relating to the number of households.
1947 to 2007 – number of households in the US increased every year,
2008, 2010 and 2011 – number of households dropped even as the population grew.
Economist Scott Sumner came up with the expression Demographic Depression which has been a major cause of the weak recovery. The construction of new homes normally contributes greatly to the level of economic activity but when people are doubling up, there’s little demand for owning or renting. This also impact on peripheral items such as white wear items etc. However when doubling up ceases then we can say that there should be an increase in demand for housing, rentals, and white wear items. Research of past recessions shows that when unemployment falls household formation rebounds quite strongly. But global conditions and commodity prices could lead the Fed to tighten monetary policy but this would be going against what their stand of 0% interest rates to 2014.
Nouriel Roubini – New York University said in 2005 that homeowners have become too used to financing their spending by borrowing against their property. This is all very well until the value of the house declines. Today he says we are going to have further problems in the world economy in 2013/2014 when China faces the situation that the USA experienced in 2008. The world will question how solvent China is and the subsequent chaos will cause a massive global downturn – see news clip below from CNBC.
Richard Wolff (a prominent Marxist economist) – stated that in 2008 that the bursting of the housing bubble would bring about a crisis that would seriously affect American confidence in capitalism and subdue the economy for a long period of time. Shortly after saying this Lehman Brothers went bankrupt.
Here is a clip from the PBS Newshour with reporter Paul Solman and Simon Johnson – former IMF economist and now at MIT. Solman goes back two years when he interviewed Johnson about the shape of things to come in the US business cycle. Looking at today Johnson states:
“So if you think about GDP, here, the story is not so bad. So we were growing up until 2007, end of 2007, early 2008, and we come down pretty sharply, and then we have some recovery. Problem is, we’re not growing fast enough, we haven’t grown fast enough to keep up with population growth. And when you adjust GDP for inflation, we’re about where we were six years ago, end of the second quarter of 2005. So it’s not a lost decade, but it’s a lost half-decade already.”
New York University Professor Nouriel Roubini predicted the 2008 Financial Crisis and is now suggesting that 2013 will be a significant year for the world economy. He makes a number of claims which allude to a major economic catastrophe:
1. There is too much public and private debt worldwide – the US is running over a trillion dollar budget deficit.
2. US unemployment figures are high (9.1%) and the indications are that it will be a this level for a few years
3. The increase in oil and food prices. This leads to less disposable income becoming available for other goods and services
4. Rising interest rates in Asia
5. The Japanese earthquake which has disrupted world trade.
6. Stocks worldwide have lost more than US$3.3 trillion since the start of May
7. China’s economy may face a ‘hard landing’- there are concerns that it will have a lot of excess capacity as world demand dries up.
Here is a clip from Inside Job that has interviews with Nouriel Roubini
A new report shows U.S. employers added 192,000 jobs in February and the jobless rate fell to 8.9 percent. Jeffrey Brown – PBS News Hour – discusses the numbers and recovery prospects with former Labor Department Chief Economist Lisa Lynch and Nariman Behravesh, chief economist at IHS Global Insight, an economic and financial forecasting company. Companies seem to have a more positive attitude to the economy and exports are on the increase. However, with oil well above $100 a barrel there are fears that this could undermine the recovery. Well worth a look.