October 29, 2012 Patrick Oliver-Kelley

US Economy

Let er rip Bernie

The U.S. economy is showing signs of finally bottoming out: Americans are on the move again after record numbers had stayed put, more young adults are leaving their parents’ homes to take a chance with college or the job market, once-sharp declines in births are leveling off and poverty is slowing. – The U.S. housing market is starting to thaw and prices are firming. Durable goods orders were up and unemployment is down slightly. However household wealth in the US and Europe, fell for time since 2008. But the economy is still frail. Growth has sunk below 2%. Wall Street is looking up and Consumer Confidence is improving. Central bankers are at their printing presses, improving the mood generally. The Federal Reserve is buying mortgage-backed securities; The ECB promised to buy as much sovereign debt as necessary to quiet fears of a euro break-up; the Bank of Japan extended and expanded its asset-purchasing program by over $125 billion. Fear of inflation is justifiably nil. There is still spare capacity. The Fed clearly can do nothing about a slowing world economy and Europe sliding into recession. Any forces holding back the recovery should be weakening. The process of deleveraging is well advanced. Consumers are feeling better off and banks appear to be more willing to lend. Our biggest problem is fiscal policy. The economy can easily tip back into recession, if politicians do not come up with a medium-term plan that both raises revenues by reforming taxes and arrests the long-run growth of spending on entitlements.

The most dramatic signs of a US revival are in manufacturing. Even as it was losing out to emerging manufacturing powers in the last decade, the U.S. was reacting much more quickly than other rich nations, by restraining wage growth, boosting the productivity of re-arming workers with new technology, allowing a steady fall in the dollar that has made US exports much more competitive, particularly relative to Euro nations, and incorporating inexpensive new foreign sources into its supply chains.

Energy is also rapidly emerging as an American competitive advantage. After falling for 25 years, the share of the US energy supply that comes from domestic sources has been rising since 2005, from 69 percent to around 95 percent, due to increasing production of oil and particularly natural gas. This is pushing US natural gas prices to the lowest rates in the world, inspiring manufacturers to relocate to the United States.

The big danger in the U.S. remains the government failure to attack the debt problem. If you compare the United States to its rich peers, it has the best chance to be a Breakout Nation, particularly if Washington can attack the public debt.



The euro-zone crisis is getting worse, not better, to judge by the latest economic surveys; manufacturing is slowing and sentiment is worsening. Companies are worried about the global growth outlook, while euro-zone crisis interventions that have buoyed markets haven’t yet translated into benefits for the real economy. A look at Germany shows that not all of Europe’s problems are homegrown.

That is something of a puzzle. Although Germany is politically enmeshed in the euro-zone crisis, it faces few economic headwinds. German companies can borrow at ultralow rates, unemployment is low, wages are rising, and there is no need for budget austerity. The expectation was that declines in euro-area demand for German exports could be offset by demand in the rest of the world and domestic consumption. But German companies aren’t putting cash to work.

Perhaps Germany is being hit harder than expected by slowing growth in China, its fifth-largest export market, which is also hurting exports from other emerging markets; Some emerging-market nations have started to run trade deficits—but for the wrong reason: a collapse in exports, rather than a potential global positive shift toward greater demand for imports. Global rebalancing still has a long way to run.

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