American consumer confidence has been robust in recent months. US stocks have done well this year returning, on average, 10% or slightly more to investors. Americans have been spending again, more than what they earn. Home prices have stopped falling and may even be rising. The Economic Cycle Research Institute made a recession call in September 2011 and it has not yet materialized. It has gone quiet now. Yet, Bare Talk is discussing recession because of unmistakable signs that economic activity in the US remains weak and, importantly, is turning weaker.
Let us start with American consumption. In the last two months at least, if not longer, personal spending growth has substantially outpaced growth in personal income. Both are more comprehensive measures than the retail sales and wage income data that investors focus on. This may be good news for those who have a fetish for economic growth. But, this is neither desirable nor sustainable. Consumption ought to be a consequence of economic growth and not a cause of economic growth. That is why Bare Talk was aghast to read that the Indian finance minister was exhorting Indian banks to reduce interest rates on loans for purchase of consumer durables. This is not only micro-interference in the commercial decisions of banks but also macroeconomic shortsightedness.
Thanks to the disincentive for savings—real rates are deeply negative in the US and still so in India—the American personal savings rate (as a percentage of disposable income) dropped to 3.3% in September from a high of around 8.3% in May 2008. Wage growth is anaemic. Growth in the average hourly earnings of non-supervisory workers in the private sector was 1.55% in October. Official consumer price inflation is 2%. Thus, real wage growth is negative. US household debt to gross disposable income ratio had indeed come down from 126% in 2007 to around 106% in 2012-Q2, but 2011 might well be the last year in which this ratio came down. At the same time, household networth to disposable income ratio that stood at 661.2% in 2006 is now hovering at little over 500%. Also, the US business sector (and not just the corporate sector) as a whole has not done much to reduce its debt burden. The debt ratio (percentage of GDP) is at 77%, well above the 65% debt ratio at the turn of the millennium. The culture of debt-driven consumption and profit growth remains fashionable in the US.
Mitt Romney, if elected president of the US, might appoint a new Federal Reserve chairman who might reverse the zero interest rate policy, quantitative easing and restore strength to the US dollar. That is possible but not necessarily probable since the community of prominent academic economists—on either side of the aisle—has not distanced itself from Ben Bernanke’s monetary policies. Even if that happens, a Republican presidency is unlikely to reverse the financialization of the US economy. If anything, it will be more beholden to Wall Street. Employees of top firms in Wall Street have contributed substantially more to Republican candidate Romney than to President Barack Obama. They are acting in their self-interest. However, that is not in the interest of either the US or that of the rest of the world. Hence, if Obama is elected to stay in the White House, he has the perfect reason to end the hijack of the US economy and its intellectual foundations by Wall Street since the 1980s.
Evidence that American capital spending has run out of steam is coming from more than one source. Annualized growth of non-residential private investment in equipment and software (proxy for capital spending by businesses) has declined to 4.7% in the third quarter of 2012 from a post-crisis peak of 11.9% in 2010-Q4. Orders for non-defence capital goods, excluding aircraft, were contracting at an annual rate of 7.2% in September—a fourth consecutive month of contraction. While the national Purchasing Managers’ Index is holding above 50—signalling modest expansion in the US manufacturing sector—regional Purchasing Managers’ Indices in Richmond, Kansas City, Milwaukee, New York and Chicago are all in contraction territory. Perhaps, once the election is over, most national indicators might reflect the true underlying (bad) health of the US economy more accurately. Monthly job creation in the manufacturing sector has stagnated at around 12,000 jobs—a level that was reached at the peak of the crisis in 2008. It has not improved since.
Finally, the Goldman Sachs Activity Index plunged 11.2 points in October to 32.9 from 44.1 in September. This index measures the strength of economic activity gathered from information that analysts in Goldman Sachs collect from the companies they cover. The October plunge is consistent with the deepening contraction in orders for capital goods and contraction in manufacturing activity in most regions.
Hence, regardless of who wins on 6 November, he faces an economy entering recession as he takes charge in 2013.
V. Anantha Nageswaran is the co-founder of Aavishkaar Venture Fund and Takshashila Institution.
To read V. Anantha Nageswaran’s previous columns, go to www.livemint.com/baretalk