Amid the gloom, flickers of light. Barack Obama says he has seen “glimmers of hope” for the economy. Lawrence Summers, director of the White House National Economic Council, said “the sense of a ball falling off a table” is passing. Less evocatively, Ben Bernanke, chairman of the US Federal Reserve, said this week that “recently we have seen tentative signs that the sharp decline in economic activity may be slowing”. They are right: the descent is less rapid. But a truly sustainable recovery remains a distant prospect.
Last autumn, after the implosion of Lehman Brothers, the US economy came to a sudden stop. During the last three months of 2008, household consumption – which, until mid-2008, had been rising for 17 consecutive years – fell by 1.1 per cent. Output fell by 1.6 per cent, industrial production by 5.6 per cent and non-farm employment by 2m. However, recent retail and confidence indices suggest that the pace of decline may be easing.
This was to be expected. The potent stimulant of falling energy prices has been feeding into the US economy for some months. Credit conditions have stopped tightening as fears that further systemically important institutions might collapse have cleared.
What is more, the rate at which production was scaled down in late 2008 outstripped the decline in final demand. Production levels in some sectors will need to rise to fulfil even the current sickly demand. Given the abruptness of the fourth-quarter contraction, this inventory cycle rebound may be quite strong.
In addition, US public policy has been ultra-stimulative. A year ago, the Federal Reserve – rightly – started to administer an enormous monetary loosening that is now in full swing, moving from 3 per cent interest rates to quantitative easing within a year. Although its effects are yet to feed in, Congress has also pushed through a fiscal stimulus.
Much of the rest of the world is in a similar position; the rapid fall in production and demand at the end of 2008 was global. A rebound in production as inventories are restocked may be similarly ubiquitous. Stimulant policy measures are also being undertaken around the world; states are undertaking monetary loosening and record-breaking fiscal expansions. Governments are working hard to halt the slide.
The problem is that while these forces are helping to prevent a repeat of the Great Contraction – the unremitting US economic collapse that lasted from 1929 to 1933 – it is still not clear from where new demand will emerge to permit a sustainable, long-term recovery.
The US household sector, usually a reliable source of demand, is over-leveraged. Already drowning in debt, US households’ total liabilities have increased by 2.5 per cent to $14,242bn since mid-2007. Their assets, however, have fallen in value by 16 per cent to $65,719bn. Household savings rates usually soar as consumers brace themselves for recessionary headwinds. But US consumers might well spend even less than is usual as they deleverage themselves.
Meanwhile, world demand remains weak. Outside China, few of the structural surplus countries seem to grasp the need to turn themselves from dedicated mercantilists into mass consumers. They should; if the US import-and-consume business model is dead, so too is the export-and-save strategy used in Germany and Japan.
If neither the US citizen nor foreign customers increase their final demand soon, Uncle Sam will need to keep it propped up with continued expansionary policy. The Obama administration’s pledge to halve the budget deficit by the end of the president’s first term suggests they are assuming it will not come to this. If it does, however, they will have little choice.
While the ultimate fate of the US is outside its control, there is much that the government must still do. No matter where sustainable demand eventually comes from, a functioning financial sector is an absolute necessity. It must be adequately capitalised, and believed to be adequately capitalised. When the Treasury releases the results of its “stress tests”, it must give enough information to reassure investors that the process was not a rigged rubber-stamping exercise.
The US government should battle to support demand, to keep people in their homes and workers in their jobs. As exhausted inventories are replenished, there might soon be spells of growth. But, without increased final demand from other parts of the world and a working banking system, there will not be sustainable growth. Few governments in surplus countries seem to understand this reality. Increasing demand is not an onerous duty. Consuming more is hardly a chore. But, still, we are waiting.
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