Sunday, November 23, 2014

American Pie in the Sky

NEW YORK – While the risk of a disorderly crisis in the eurozone is well recognized, a more sanguine view of the United States has prevailed. For the last three years, the consensus has been that the US economy was on the verge of a robust and self-sustaining recovery that would restore above-potential growth. That turned out to be wrong, as a painful process of balance-sheet deleveraging – reflecting excessive private-sector debt, and then its carryover to the public sector – implies that the recovery will remain, at best, below-trend for many years to come.

Even this year, the consensus got it wrong, expecting a recovery to above-trend  annual GDP growth – faster than 3%. But the first-half growth rate looks set to come in closer to 1.5% at best, even below 2011’s dismal 1.7%. And now, after getting the first half of 2012 wrong, many are repeating the fairy tale that a combination of lower oil prices, rising auto sales, recovering house prices, and a resurgence of US manufacturing will boost growth in the second half of the year and fuel above-potential growth by 2013.

The reality is the opposite: for several reasons, growth will slow further in the second half of 2012 and be even lower in 2013 – close to stall speed. First, growth in the second quarter has decelerated from a mediocre 1.8% in January-March, as job creation – averaging 70,000 a month – fell sharply.

Second, expectations of the “fiscal cliff” – automatic tax increases and spending cuts set for the end of this year – will keep spending and growth lower through the second half of 2012. So will uncertainty about who will be President in 2013; about tax rates and spending levels; about the threat of another government shutdown over the debt ceiling; and about the risk of another sovereign rating downgrade should political gridlock continue to block a plan for medium-term fiscal consolidation. In such conditions, most firms and consumers will be cautious about spending – an option value of waiting – thus further weakening the economy.

Third, the fiscal cliff would amount to a 4.5%-of-GDP drag on growth in 2013 if all tax cuts and transfer payments were allowed to expire and draconian spending cuts were triggered. Of course, the drag will be much smaller, as tax increases and spending cuts will be much milder. But, even if the fiscal cliff turns out to be a mild growth bump – a mere 0.5% of GDP – and annual growth at the end of the year is just 1.5%, as seems likely, the fiscal drag will suffice to slow the economy to stall speed: a growth rate of barely 1%.

Fourth, private consumption growth in the last few quarters does not reflect growth in real wages (which are actually falling). Rather, growth in disposable income (and thus in consumption) has been sustained since last year by another $1.4 trillion in tax cuts and extended transfer payments, implying another $1.4 trillion of public debt. Unlike the eurozone and the United Kingdom, where a double-dip recession is already under way, owing to front-loaded fiscal austerity, the US has prevented some household deleveraging through even more public-sector releveraging – that is, by stealing some growth from the future.

In 2013, as transfer payments are phased out, however gradually, and as some tax cuts are allowed to expire, disposable income growth and consumption growth will slow. The US will then face not only the direct effects of a fiscal drag, but also its indirect effect on private spending.

Fifth, four external forces will further impede US growth: a worsening eurozone crisis; an increasingly hard landing for China; a generalized slowdown of emerging-market economies, owing to cyclical factors (weak advanced-country growth) and structural causes (a state-capitalist model that reduces potential growth); and the risk of higher oil prices in 2013 as negotiations and sanctions fail to convince Iran to abandon its nuclear program.

Policy responses will have very limited effect in stemming the US economy’s deceleration toward stall speed: even with only a mild fiscal drag on growth, the US dollar is likely to strengthen as the eurozone crisis weakens the euro and as global risk aversion returns. The US Federal Reserve will carry out more quantitative easing this year, but it will be ineffective: long-term interest rates are already very low, and lowering them further would not boost spending. Indeed, the credit channel is frozen and velocity has collapsed, with banks hoarding increases in base money in the form of excess reserves. Moreover, the dollar is unlikely to weaken as other countries also carry out quantitative easing.

Similarly, the gravity of weaker growth will most likely overcome the levitational effect on equity prices from more quantitative easing, particularly given that equity valuations today are not as depressed as they were in 2009 or 2010. Indeed, growth in earnings and profits is now running out of steam, as the effect of weak demand on top-line revenues takes a toll on bottom-line margins and profitability.

A significant equity-price correction could, in fact, be the force that in 2013 tips the US economy into outright contraction. And if the US (still the world’s largest economy) starts to sneeze again, the rest of the world – its immunity already weakened by Europe’s malaise and emerging countries’ slowdown – will catch pneumonia.

Read more from our "The Roubini Factor" Focal Point.

  • Contact us to secure rights


  • Hide Comments Hide Comments Read Comments (19)

    Please login or register to post a comment

    1. CommentedChee-Heong Quah

      This once again shows the failure of government meddling in the affairs of the economy.

      1) The solution is straightforward, abolish the Fed, repeg the dollar to gold. Get rid the Fed from money creation.

      2) Reduce the size of government to roughly 10% of GDP.

      The above will let the private markets work efficiently and effectively.

    2. CommentedSandee Roberts

      Yes, we got it wrong and we are still not understanding how to fix this crisis. Our society's structure needs to change and this crisis is actually going to help us discover the who, what and why of the problem. It is NOT a financial crisis! This crisis is ALL about US!

      Question: How will our children survive the crisis when there is no money for their basic necessities? Will they even survive? We have exploited and robbed our very own children of their future! It is already happening with loss of jobs due to school mergers and closures and lawmakers policies on our youth. What future are we providing our children?

      Kansas City School
      Uploaded by CNN on Mar 11, 2010

      Students to Prison Policies
      Published on May 29, 2012

      We need to start working together, restructuring the values on which our society are built. Focusing on a new type of education. We as a people have lost our connection to our true reality, which is very integral and interdependent. Today, it is seen globally, that we are all interdependent and connected and yet we are still trying to operate on an old system of personal concerns and benefits. Our systems must now fit the new model of benefiting others!

      If we unite with each other towards a common goal, we can greatly improve our society quickly, to achieve discounts and mutually beneficial exchange, learning to help each other, instead of paying someone money, etc. Someone will voluntarily take on a children’s club, others will also contribute, and we will be able to live a normal life without money, discounted by the crisis.

      We will feel the need for and the benefits of reciprocity.

      Unity aimed at a common goal has great power to change our future quickly. It doesn't have to turn out bad; The future is in our hands!

        CommentedCarl Roberts

        This is my biggest concern, the lost of our children’s future!" Thanks for the post! Let's change the world!

    3. CommentedRoman Bleifer

      I hesitate to say what they think all economists. But in December 2011 was published forecast for 2012 ( ). According to this forecast, the epicenter of the global crisis could move from Europe to the U.S. in late 2012. This prediction was not made by extrapolation of the available economic information, and based on the understanding of the nature of the author of the forecast of the processes that we call the global economic crisis. The dynamics of the events taking place until the forecast corresponds to the views expressed.

    4. CommentedWilliam deB. Mills


      Well stated. To put it briefly, economics and politics can be structured for capital (profit) or social well-being. In practice, the two are obviously not mutually exclusive, but to the degree that capital accumulation is preferred over creating a good society, then that is exactly what will happen. Over the last decade, Wall St. has become a marvelous machine for short-term capital accumulation (except for those, like Lehman, that Wall St.'s political lackeys decide to sacrifice). The only problem is that society is being sacrificed. Wall St. need not be, but in its hubris has defined itself to be, the enemy of society.
      --William deB. Mills

    5. CommentedGraham Hodgson

      Banks hoard increases in base money because there's nothing else to be done with them. They are just deposits at the Fed and they can only be transferred to others holding deposits there - other banks and government. But Congress won't allow the government to borrow them and won't allow the government to take them through taxation, so they just sit there. Short of the banks using them to buy banknotes and handing these out at the door, there's no way for the general public to get their hands on them.

      Base money is used to settle payments to third parties on behalf of bank account holders, and bank accounts will only increase if people are prepared to take out bank loans. No amount of additional base money is going to change that.

    6. CommentedJohn James

      At the risk of viewing the global macroeconomic environment too simplistically:
      1. It is obvious the world is flush with liquidity
      2. There is a bifurcation in interest rate levels between the West and non- Western nations (adjusted for risk)
      3. The West is in a relative decline in economic valuation and growth
      4. No serious effort is being made or suggestions offered to enfranchise the overwhelming majority of the global population which, ultimately, must be the new consumer base.
      5. We (West) have been in this paradigm shift of economic restructuring for 50 years now with no intelligent recognition concerning the employment/consumption realignment that must take place.
      6. Absent a major intellectual/cultural revision, the global economy will morph into a quasi feudal/neo-facist economic order with global corporations replacing the nation-state as the primary driver of economic/security power.

    7. CommentedAgostinho Vubo Vubo

      Pelo aquilo que se ouve e vive na Europa, não restam dúvidas que os modelos económicos não mentem, há algumas verdades a ter em conta, os ciclos de crises na economia vão sempre existir, quer sejam de curto e longo prazo, tudo não passa em melhorar ou ajustar os modelos económicos, ou seja, todo político, tecnocrata e o visionário, deve engajar-se na busca de teorias alternativas capazes de melhor a eficiência na utilização de recursos escassos para garantir o bem-estar comum. Seria melhor ainda toda sociedade e políticos parar e demandar pelo menos, 60 segundos à Deus para termos a solução dos problemas que nos aflige.
      Agostinho Vubo.

    8. Commentedcaptainjohann Samuhanand

      2012 elections and the necessity for ruling Politicians to have a good stock index will drive this year's economy.American economy sustains on wars in Asian and African continents and so induces them.But it saps the moral values of the American nation itself in the world.Today an American coach wails about a Chinese prodigy in swimming while extolling the achievements of Phelps. The total medals tally in Olympics reflects the economy and physical and mental health of nations and America is slowly shrinking.

    9. CommentedStephen Pain

      There is an offshore economy which amounts to trillions in loss taxation, organized crime the same, the US sovereign debt of nearly 100 trillion or more - and so many other holes in the notion of an organized, rational, civil, efficient economic system. It is leaky as hell.

      I would much prefer that instead of talking of double-dip recessions - one of the most ridiculous terms ever - if it were scoops of icecream fine - but two dips - is a euphemism for a depression.

    10. CommentedWilliam deB. Mills

      While Roubini’s review of U.S. economic prospects indeed sounds like “gloom and doom,” it hardly touches the seriousness of reality because it omits the class war by the rich [] that is warping our marvelous economic machine, replacing long-term growth with short-term financial manipulations.

      The campaign by the super-rich to profit by stealing from the poor and using the funds for financial manipulations (rather than investment in productive enterprises) is the worst of all possible worlds for the long-term economic health of the country. Wisconsin Governor Walker’s union-busting campaign and the Supreme Court’s replacement of “one man, one vote” with “one dollar, one vote” are symptomatic. Whatever his sins, at least Stalin did concentrate funds on industrial growth; Wall St. today is worse – using the funds it takes from society for leveraged gambling that destroys lives quite as effectively as Stalin did but without building anything in return. The Obama Administration has wasted four years carefully refusing to face the need to punish financial crime, so the behavior that caused the Financial Crisis of 2008 remains unchanged, as illustrated by the libor scandal and mess at Morgan. As for the millions who lost jobs and homes, they are being defined as “superfluous,” [] like the Neo-Liberal victims of Pinochet and the Argentine junta’s “dirty war.”

      In the U.S., as Roubini says, we do indeed face a major economic challenge, but that challenge is not the cause of our troubles; it is the result. The cause, i.e., the real challenge facing the U.S., is socio-political: the social contract we call the New Deal essentially allowed the super-rich to remain super-rich as long as they accepted sufficient controls (regulation) so that the pie would continue to grow and the rest of society would also get steadily larger pieces. The class war is the decision by the super-rich over the last generation to break that agreement and ignore the size of the pie (long-term economic growth) in order to focus on increasing the size of their pieces by seizing slices from the vastly smaller but more numerous pieces in the hands of everyone else (short-term consumption of the seed corn). Roubini’s enumeration of our economic problems focuses only on second-order effects caused by our first-order socio-political challenge: we are under attack by the super-rich.
      --William deB. Mills

    11. CommentedGianni Conti

      As Roubini explains, legislations and regulations, and I might add, anything we do on the surface, will fail to save us from the coming collapse. People and their values are what stand behind the global economy. We need to change these values. Currently the respected value is to amass the largest quantity of cash and property. Since society respects this above all, it leads to crises. All the world leaders, and for that matter, people in general, need to sit at a roundtable as one family and realize that they have become completely interconnected and interdependent, in terms of their markets, all the societies being completely connected via social networks and other technologies, just like cells in one body. Today all people have a common interest in the well being of every one else. We need to reach this sensation that all on this tiny planet are facing serious troubles and we are all in one boat. From this, we will be able to solve the world's problems like a family decided where its finite resources are needed most, at the moment. Grandpa needs medicine, ok, it's a priority; baby needs food, etc. We never wised for this scenario to come to pass, any more than, say Germany ever desired to give its neighbors and competitors multi-billion dollar presents, but we are living in a new world, unique in all of history.

        CommentedEdward Ponderer

        Sadly, Prof. Roubini while Prof. Roubini successfully analyzed the present crisis, he doesn't seem to account for the fact that the problems do not merely threaten the economy. It threatens the very model of economics itself -- we are beginning to run blind here.

        In combination with the effects of the generally limitation of a global economic equation of limited resources and ever-tightening coupling constants of interdependence between national economies, and between economy and environment, and growing ego. Ego that has grown so much, that many in influential positions know how to manipulate the very system that based itself upon rigid assumptions of what that ego would do. That is, the hunter has become the hunted -- and very successfully, catastrophically, hunted. And, for example, go predict a 9-11 or other ego-chaotic effects multiplied by a suicide mentality and the technology to back it up.

        In short, Gianni Conti's suggestion to go for one-on-one round tables, developing a family-like psychology, and otherwise aim towards a mutual-responsibility based economy rather than a greed based one, seems the only way to restore our sight and save, hopefully once more prosper ourselves.

    12. CommentedMichael Muoio

      Taxes, taxes, taxes! We all hate them but we sure don’t mind talking about them.

      There is one incredible fact regarding taxation that seems to be lost in the current dialog and here it is:

      Our current federal income tax has not been as low as today dating all the way back to 1929 when the top marginal rate was 24%.

      With the exception of the 5 years of tax relief following the last financial crisis in 1987, we have never been as free of tax as we are today.

      Indeed, we are so free of tax that our Republic is going broke.

      We spend $3.5 Trillion per year and we collect $2.5 Trillion.

      What is truly diabolical is the fact that many politicians want to reduce taxes another $1 Trillion. And they want to pay for it by reducing Medicare, Medicaid, Social Security and Education and by selling public assets like roads, bridges, parks, municipal water and utility systems.

      The best years that our Republic ever had were when our taxes were at they’re highest in the 1950’s and 1960’s. In fact, the profligate 1920’s with the marginal tax rate of 25% caused the Depression.

      There are many qualifications for Congress, but clearly sanity is not one of them.

    13. CommentedSteven Cox

      It seems as if everyone is so concerned with this quarter's, or next quarter's results. This should not be the concern. There are structural problems in the US economy and these must be addressed - even if it means a contraction.

      1. A national consumption tax is needed.
      2. Health care costs can and should be addressed. In some cases 1/3 of a doctors income goes to malpractice insurance. Tort reform must be enacted. Doctors are overpaid. One simple way of dealing with this is no one should see a doctor until they have first seen a nurse. Some doctors estimate 90% of their visits are issues a nurse practitioner could deal with. Drastic end of life care costs have to be addressed. It should be possible to cut 1/3 of public health care costs down, and provide the same service.
      3. End the war on drugs. It is crazy prison costs are higher than education costs in some States.
      4. Increase taxes on the middle class, and the poor. The middle class, ie those making $50-$200,000 must pay more, and the poor have to pay something. Everyone has to have some skin in the game.
      5. Address China. Their currency must float...end of story.
      6. Stop going to war.
      7. Pension reform. The US is not immune to the laws of arithmetic. Of 100 people working, only 60 are in the private sector. So, 60 are supporting themselves, plus 40 more. But, add to that previous public sector workers, the pensioned class, probably as much as 30 more, plus another 10 who have never contributed anything. Sixty end up supporting a total of 140. To do that, and not run deficits, average tax rates would have to push about 80%. Obviously, impossible. So, government runs deficits, a policy that has finally caught up to you. Pensions have to kick in when a person hits a certain age, regardless of when they retire, and must be topper uppers to ones own savings, not a lifestyle. In California some public employees get full pensions after 20 years. You can retire in your early 40s and be paid until your 80s!! Does this make any sense? Can you pay someone for 3 years, indexed, on one years work?

      Reforms such as these have to be enacted regardless of the effect on the unemployment rate, etc. This will sort itself out. But, right now the underpinnings of the economy aren't sound. Without strengthening the foundation you can't fix the stuff on the surface.

    14. CommentedBrendan Dornan

      Christina Romer's research shows each 1% increase in tax revenues results in a 3% drop in GDP over the next three years. Europe, particularly the U.K., has tried tax hikes and fake promises of spending cuts. They are not alone, spending across Europe is still increasing, incredibly, but many VAT and income taxes have been levied. Reducing budget deficits on transfer payments and government waste, reduces expectations for further tax hikes, boosting the economy.

    15. CommentedJacob Geller

      "The consensus"? What consensus?

      I look at the last three years of economics punditry and I see lots and lots of disagreement. There has been no consensus.

      Furthermore, to the extent that economists et al *have* agreed on anything, it has generally been that we are almost definitely *not* "on the verge of a robust and self-sustaining recovery." Pessimism has generally been a more common mode than optimism in the last three years of economic forecasting.

    16. CommentedPaul A. Myers

      The US may be in for a period of slow growth, but it probably will not be allowed to outright "stall" by the policy makers; they will patch and patch. I would posit a most likely case of 2-3 percent real growth going forward in the US. The S&P500 companies are world beaters; the US private sector has added about 4.5 million jobs since the downturn and will probably continue to add 1 to 3 million jobs a year. The private sector base gets stronger and stronger.

      The US has been deleveraging its state and local government sector, a source of inefficiency and unproductivity. It will probably slowly start to bring federal revenues and expenses into synch next year.

      The US election is going to decide some things, possibly pretty decisively.

      In a globalized world, a large number of countries will have competitive growth sectors in their economies. The same countries will also have "drag" areas of low growth and low productivity. You will have almost two societies living in one living space.

      A declining median real wage in the US poses many problems but also creates a more competitive overall economy in a relatively low real wage world. If the US wants to increase its median real wage, then it has to start making public investments in infrastructure and improve the outputs from the social investment in education.

      Private investment improves the real wage in the top tier which consist of people who realize the most out of their education assets. To improve the median real wage, the society through its political system must make very broad-based public investments. For now, that public seems to want "my benefits" and vote its resentments.

      The various iterations of the "Me Generations" that have followed the Greatest Generation are probably going to get what they have worked for and what they have voted for. And that will probably be "less." So 2 percent growth it will probably be.