QUERETARO, Mexico, Sept. 3 (UPI) -- The noble vocation of the economist is to make the weather forecasters look good. At present U.S. economists are flocking together and bleating happily: of sunshine in 2004. The economic weather is going to be good, they say. But why?
It is, it should be said, an economist who spent more than a few years in the forecasting game who is writing. He observes all from an agreeable distance, no longer having to write economic forecasts. But he looks on with astonishment.
Take this from Bruce Kasman, an economist at J P Morgan, the investment bank: "The global economy appears poised for a sustained period of above-trend growth. Key to realizing this outcome is that the economic expansion builds on the momentum generated by U.S. consumers."
Well, we have to agree. If "the economic expansion builds," we shall have growth. If there is growth there is growth. And if the north wind doth blow, we shall have snow. But will the economic expansion build? Kasman goes on: "Progress on this front should be manifested in two ways. The first is a pickup in U.S. business spending."
That's it. If U.S. businesses start to invest, then we shall have growth. Very good. But will U.S. consumers keep spending and U.S. businesses spend more? Kasman and a thousand other U.S. economists seem to think so. Why? Because the recent data looks better. And recent data is a good guide, isn't it?
Because if it was sunny yesterday it must be sunny tomorrow, mustn't it?
What genuinely puzzles and astounds your correspondent is that the forecasts he sees for the U.S. economy seem based consistently on no more than one thing: the latest data. Yet it is more important to understand the forces that underlie the data.
Why is U.S. growth undeniably picking up at the moment? Dr. Edward Yardeni of Prudential Financial points to why in his firm's Portfolio Management Monthly: "The economy is now recovering nicely in response to one of the most stimulative combinations of fiscal and monetary policy ever." Indeed so. "Recovering." But "nicely?"
Is a recovery generated by "one of the most stimulative combinations of fiscal and monetary policy ever" a nice one? Why did policy need to be so very stimulatory? And what will happen if there's no more stimulatory anything up anyone's sleeve? In a commentary that falls some way short of being thought-provoking, Yardeni fails to address any of these questions.
There are forces driving the U.S. economy (and therefore the global one) that we can point to, identify and even quantify. And then we can give some thought to the important thing: are those forces likely to build, putting wind in the economy's sails for some time to come, or wane, and leave it once again in the doldrums? Thought on these topics might give us some insight into whether "a sustained period of above-trend growth" is likely.
We would identify three main forces:
First, interest rates are very low. Or perhaps we should write, interest rates have gone up but are still very low. Optimism about economic recovery (and therefore less optimism about keeping down inflation) and rising issuance by the government of Treasury bonds has pushed up the yields on bonds. Tuesday, a day of particularly strong optimism about recovery, saw the yield on 10 year Treasuries rise by a further 0.15 percent to 4.6 percent. Early in June the yield had dropped to an astonishingly low 3.1 percent. The one and a half percentage point rise since then reflects a big change in sentiment and makes finance for the government, businesses and home-buyers more expensive.
Unless Treasuries strengthen again and yields come down, the peak of mortgage refinancing and super-cheap bond issuance for businesses is over. That peak occurred in May and June and its effect is being felt now. But the peak has past. That might matter, mightn't it?
How much buoyancy has the cheap finance boom generated? The Mortgage Bankers Association of America forecasts likely mortgage issuance this year at an all time record of more than $3 trillion, about 30 percent of U.S. gross domestic product. That is a lot of money flowing around in the economy. Bear in mind that before 1998 annual mortgage issuance generally amounted to less than $1 trillion and the bulk of that issuance was for new mortgages, not the refinancings that can often be used to generate a bit of extra cash for consumer purchases.
Secondly, the government's fiscal policy has been extraordinarily loose. The government has increased spending, principally on defence, while cutting taxes. In the second quarter half the 3.1 percent annualized GDP growth in the U.S. economy was supplied by increased government spending. The government's annual deficit looks set to approach the half a trillion dollar mark in the current fiscal year and will therefore be above 4 percent of U.S. GDP.
These three factors -- low interest rates, mortgage issuance, fiscal expansion -- are the wind currently in the sails of the U.S. economy. Each of them puts money in consumers' pockets and helps business along. Each is blowing at its strongest now and must wane.
The MBAA forecasts a big fall in mortgage issuance in 2004.
U.S. President George W. Bush has little scope to cut rates and spend more; the deficit is too high; the United States is indebting itself too fast.
Federal Reserve Chairman Alan Greenspan can't cut the short-term interest rate much more and seems powerless now to repeat his trick of talking down long rates.
Do these things matter? When you take the stimulus away is there not a risk that the economy will have no wind in it at all?
Before we sign off, let us ask another question which sounds silly but isn't. Where should the wind come from? What should drive things forward in a healthy economy?
It should not be government spending -- but in the United States, it is. It should not be spiraling debt -- but in the U.S., it is. It should not be inflation of house prices--but in the U.S., it is.
Healthy growth sees businesses investing and selling to consumers who are not indebting themselves more and more in order to keep up their spending. The U.S. economy cannot grow in this way because it is unhealthy -- and becoming more unhealthy by the day.
Balances and imbalances are signs that point to economic health or the lack of it. Economists appear to have forgotten that they matter. It is not for nothing that the U.S. economy has its biggest ever trade deficit and, in nominal terms, biggest ever fiscal deficit. The United States is consuming too much, indebting itself too much and saving too little.
How can the U.S. economy now embark on a sustained period of above trend growth? It already has trade and current account deficits that suggest the economy needs a fall in domestic demand and can only grow via exports.
The stimulus is going to run out. Nothing will replace it. In 2004 low growth or outright recession is likely for the U.S. economy, and the global impact of that will be negative.
If that conclusion is too gloomy for you, however, please do not be depressed. Cast these words aside and take comfort in the output of myriad Wall Street economists. All that matters, it seems, is that it's sunny today. It will therefore be sunny tomorrow. And even sunnier, supremely sunny, next year.
Global View is a weekly column in which our economics correspondent reflects on issues of importance for the global economy. Comments to [email protected]
