What Makes A True Recovery?
Source"...The obvious lesson to draw is that an economic rebound with the necessary strength to pull the economy towards 3-4% real GDP growth again needs contributions from every single demand component: consumer spending on durable goods, nondurable goods and services; and business fixed investment, inventories and residential building. In other words, to have a solid and sustained recovery, the economy’s engine has to fire on all cylinders..."
Dr. Kurt Richebächer
Cannes, France - America's forecasters are trumpeting that the economy's final recovery from lackluster growth is definitely at hand, predicting for the second half of the year a real GDP growth rate of 3.5-4%, annualized. The common great hope is that better corporate earnings will spark the fervently desired and badly needed business investment recovery.
Mulling over this forecast, we first of all asked ourselves what cyclical recoveries in the past have looked like as to strength and pattern.
The great irony about the current optimistic forecasts for the second half of 2003 is that they grossly lag the growth rates that were common to past cyclical upswings from recessions. The real GDP growth rate of all postwar recoveries averaged 5.3% in their first year and 5.8% in their second year. Annualized quarterly growth rates were between 5-10%. This compares with an annualized growth of 3.5-4% predicted for the current half of 2003. Take the annualization away, and it means real GDP growth of only 1.75-2%.
As to the pattern of past cycles, we made another interesting and most important discovery. Whenever the Federal Reserve eased, spending in the economy shot up across all demand components.
In 1976, for example, the rate of real GDP growth soared from -0.4% in the year before to 5.6%. Within the aggregate, the share of consumption surged from 1.33 to 3.67 percentage points, while gross domestic investment swung as a share of GDP growth from -2.98 to +2.84 percentage points. Business investment, plainly, was the crucial swing component.
In 1983, real GDP growth soared by 4.3%, after -2% in the year before. Consumer spending surged as a share of total growth from 0.76 to 3.49 percentage points and gross private domestic investment from -2.54 to +1.48 percentage points. Government spending, by the way, always played a negligible role.
The obvious lesson to draw is that an economic rebound with the necessary strength to pull the economy towards 3-4% real GDP growth again needs contributions from every single demand component: consumer spending on durable goods, nondurable goods and services; and business fixed investment, inventories and residential building.
In other words, to have a solid and sustained recovery, the economy's engine has to fire on all cylinders. But that is the most improbable thing to happen this time. Because consumer and residential expenditures have kept rising during the overall downturn, there is very little or no pent-up demand at all on their part. If long-term rates do not fall again, the two demand components may even contract.
Trying to maintain some appearance of a superior U.S. economic performance, Mr. Greenspan never tires of emphasizing the sustained productivity miracle. For reasons explained, we have always regarded it as another statistical hoax. There is, in any case, no economic merit in rapid productivity growth that only shows in rising unemployment.
It is a typical mantra of most American economists that productivity growth is the most important factor about economic well-being. In actual fact, it is a statistical number, no more. Whether or not it raises living standards and also creates employment and profits depends completely on the way it comes about.
As a rule, it comes about by putting more machinery behind every worker. In short, capital investment is paramount. It is decisive in boosting recorded productivity growth. But most importantly, it creates, first of all, demand and employment while the capital goods are produced, and secondly, it adds to capacity when the produced capital goods are installed.
Economically, it is in reality all about capital investment, not about a statistical aggregate, conventionally called productivity. For these reasons, the old economists focused exclusively on capital investment, rarely mentioning productivity.
Ultimately, all questions about a sufficiently robust U.S. economic rebound boil down to one single question: whether this will jump-start business fixed investment. Consumer spending, bolstered by the house-price and bond bubble, has so far prevented the economy's relapse into recession, but it completely lacks the necessary thrust for a sustained and self-reinforcing recovery.
Respected International Banker, Economist and Author
Dr. Kurt Richebächer's articles appear regularly in The Wall Street Journal, Barron's, the US edition of The Fleet Street Letter and other respected financial publications. France's Le Figaro magazine did a feature story on him as 'the man who predicted the Asian crisis.' Dr. Richebächer is currently advising investors on how to profit from Greenspan's mistakes.