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REAL WORLD EVENT DISCUSSIONS
The optimist's case for the US economy
Tuesday, September 4, 2012 4:05 PM
"Love is natural and real. But not for you my love. Not tonight my love..."
By Roger Altman
In the past three years, the most noteworthy aspect of the US recovery has been its weakness. The headwinds arising from the 2008 financial collapse, especially against household finances, housing and lending, have held annualised growth at the meagre 1.7 per cent rate we saw in the last quarter. They have prevented an improvement in the labour market, as evidenced by the recent 30-year low in the proportion of the workforce in employment. These headwinds are now beginning to abate but it may be another four years before they fully subside.
But when they do, it is possible that the US economy will surprise on the upside. A housing revival, the revolution occurring in energy, a rejuvenated banking system and a leaner industrial base could lead to US growth beyond the 2.5 per cent rate that is widely seen as its long-term potential. In other words, the famine could be followed by a feast.
There are precedents for such a growth spurt. We saw it in the recovery from the deep 1981-82 recession and over the latter half of the 1990s. True, those periods were not preceded by a financial collapse. But they did not involve a monetary response as powerful as that unleashed by the US Federal Reserve in 2008 and 2009. There are now serious forecasts, for example from the International Monetary Fund and The Conference Board, which suggest the annual growth rate may reach 3-4 per cent within five years.
There are five factors that suggest there could be a surge in US growth. First, the housing sector is improving. Between 1980 and 2005 it accounted for an average 4.5 per cent of gross domestic product and before the crash it employed more than 3m Americans. But in 2012 it represents only 2.4 per cent of GDP and 2m jobs. Almost 1.5m mortgages are still in foreclosure.
But the first signs of renewal have appeared: prices are rising in almost half of the country’s major housing markets. Pent-up demand is huge. Goldman Sachs expects housing starts to hit 1.4m annually by 2015, up from 700,000 this year. After 2015, the total will rise further and boost GDP, as household formation rates and the starts-to-population ratio revert to historical norms.
The second cause for optimism is the breathtaking increase in oil and gas production. Data from the US Energy Information Administration support this. Natural gas output reached an all-time high this year, with shale gas accounting for half of it. On the oil side, US production fell 48 per cent from its 1970 high to only 5m barrels a day in 2008. Driven by shale, it is up almost 20 per cent from 2008 to 2012. IHS Cera, a research group, projects that oil production will rise another 3m b/d and reach a new high by 2020.
Within five years, the oil gains alone could add more than 1 percentage point to annual GDP growth and up to 3m jobs. The fall in natural gas prices will reduce the average utility bill by almost $1,000 a year. It will also reinvigorate the US petrochemical industry and some manufacturing sectors.
Third, amid the political controversy and negative publicity, the US banking system has recovered faster than anyone could have imagined. Capital and liquidity have been rebuilt to levels unseen in decades. Legacy mortgage problems are fading. Profits are very strong. Lending is growing quickly: total bank credit outstanding now stands at $9.8tn, according to Fed data, a record high. The proportion of bank lending going to business will next year probably reach a record level.
Fourth, the US has made a huge leap in industrial competitiveness. Unit production costs are down 11 per cent over the past 10 years, while costs have risen in almost every other advanced nation. The differences in labour costs compared with China are narrowing. Consider the automotive sector. In 2005, Detroit’s hourly labour costs were 40 per cent higher than at US plants owned by foreign carmakers, according to research by Evercore Partners. Today these costs are virtually identical and the big three carmakers have regained market share. Furthermore, personal savings rates are up to 4 per cent – from near zero before the crisis – and are expected to stabilise. This will spur higher levels of private investment and even further productivity gains.
Finally (and more speculatively), the US may surprise itself and the world by rectifying its deficit and debt problems. If Barack Obama is re-elected, he may allow the George W. Bush tax cuts to expire at the end of 2012. That step could force Congress to the negotiating table and produce a large, balanced deficit-reduction programme that would boost confidence, the stock market and private investment.
Many leading economists would challenge this surge theory. They foresee another decade of continued headwinds and mediocre growth. That may be the mainstream forecast but an alternative, better scenario is coming into view.
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