15 Reasons Why the Economy Faces a Weak Recovery

James Pethokoukis Reuters August 5, 2009

What sort of recovery will the American economy have? With estimates of 3Q growth rising on Wall Street — along with the Dow — here is why the optimism may be overstated. First up is David Rosenberg of Gluskin Sheff (outline by me):

1. The foundation for any durable recovery in a modern industrial economy rests with the organic dynamism of the private sector. Ask anyone in Japan as to how repeated rounds of fiscal stimulus played out over the past two decades.

2. We are still in a post-bubble credit collapse world and there are still too many uncertainties associated with the outlook for the economy, corporate earnings, financial stability and fiscal rectitude (or recklessness is more like it).

3. Wages are deflating at a record rate and credit in the banking system is still contracting as banks continue to shrink their balance sheets.

4. Three-quarters of the corporate universe have no revenue growth to speak of.

5. Only one-third of the ISM industries posted growth in July and barely more than one in ten were adding to payrolls.

Now here is former bond guru David Goldman on why the recession “will last forever” (a bit tongue in cheek and in reverse order of importance):

10. No innovation. As Nobel Prize Laureate Edmund Phelps [put it recently]: "I'm not convinced that there's going to be another wave of innovation in the offing."

9. Speaking of innovation, the US isn’t getting the clever immigrants it used to.

8. China will hold its own but its economy is too small to act as a locomotive for the rest of the world (maybe for Korea).

7. If the rest of the economy starts competing with the Treasury for capital, interest rates rates will rise immediately and suppress economic activity.

6. The rest of the world is full up on US Treasury securities … the US is on its own financing the deficit.

5. The US consumer can't get out of a hole.

4. American demographics look suspiciously like Japan's in 1990, at the beginning of the "Lost Decade." Japan's elderly dependent ratio jumped from 18% to 26% over the 10 years; between 2010 and 2020, America's will rise from 19% to 25%. … They have no savings to speak of and what they thought was their nest egg (home equity) just vaporized. … . The combination of demographic and wealth shocks should produce a loop-de-loop in the "marginal propensity to save" such as we have never seen before, except, of course, in Japan.

3. More taxes are en route, to pay for health care, the interest on the federal debt, or whatever. No country ever taxed its way out of a rececession.

2. The rule of law has been severely weakened in financial transactions, through heavy-handed White House intervention into the bankruptcies of the auto sector, through mortgage renegotiation, and so forth.

1. Barack Obama! … . Obama knows that if the economy crumbles and he's the only one left with a checkbook, then everyone has to come to him. … The banks, the hedge funds, the manufacturers, the municipalities … Obama is the first American president (with the possible exception of FDR) to actually benefit from economic weakness.

Thanks for the great 3×5 summary of these salient points. The scariest point I think is actually Goldman’s #5. The ‘recovery’ we are seeing is built on the back of profligate government spending, amplified by consumer leverage.

Cash for clunkers would be great, if not for the fact that consumers are trading into new, efficient (and often more expensive)cars. This means more debt.

The stimulus was initially a ‘disappointment’ because it was used by consumers to pay off debt. Now it is being lauded as the engine behind the recent uptick in spending. If spending is going up, savings is still anemic, and wages are going down - that means there must be more debt being created, no?

Long story short, if investors are excited by the notion that we can spend our way out of this, then they’d better hope they get their money out before the whole thing pops again.

Someday we’ll figure out that we can’t build leverage and call it ‘wealth’. The higher standard of living and productivity that comes from an inflationary debt-driven economy only lasts until a link in the chain breaks.

We’ve already seen a catastrophic breakage in the chain once in the past 24 months - do we really believe yanking harder is going to fix it?

We are simply unconstitutional.

David Goldman’s reason #2, “The rule of law has been severely weakened” absolutely does not get enough attention. I am a small (very very small) investor. Yet, this has definitely affected my confidence in corporate bonds going forward and makes me much less likely to invest.

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James Pethokoukis is the Money & Politics columnist and blogger for Reuters where he covers the nexus of Washington and Wall Street.

Previously he was the economics columnist and business editor at U.S.News & World Report magazine. Pethokoukis is also an official CNBC contributor and appears frequently on that network's Kudlow Report, Power Lunch, and The Call shows. In addition, he has appeared numerous times on MSNBC, Fox News Channel, Fox Business Network, CNN, and Nightly Business Report on PBS.

A 1989 graduate of Northwestern University where he double majored in Soviet politics and American history and a 1991 graduate of the Medill School of Journalism, Pethokoukis is a 2002 Jeopardy! champion. Pethokoukis can be reached at james.pethokoukis@thomsonreuters.com. James Pethokoukis Feeds Subscribe to all posts via RSS (What is RSS?) Recent Posts The long recession: 15 reasons why the U.S. economy faces a weak recovery Double taxes on the rich and you still wouldn’t balance the U.S. federal budget North Korea: Global markets are also potential prisoners — and Clinton can’t help them The green jobs mythology, again Ron Paul’s Fed audit idea: Are there any economists in favor? Archives August 2009 July 2009 June 2009 May 2009 Blogroll Bizzy Blog Calafia Beach Pundit Capital Gains and Games Econbrowser EconLog Enterprise Fundmastery Instapundit Kudlow’s Money Politics Power Line RealClearMarkets Say Anything The Everyday Economist

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15 Reasons Why the Economy Faces a Weak Recovery

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