Comstock Partners, Inc.September 29, 2011
What are the Driving Forces for the Economy?
Dr. Austan Goolsbee, formerly the Chairman of the Council of Economic Advisers of President Barack Obama, is now a professor at the University of Chicago at the Booth School of Business. He appeared on "This Week" on ABC this past Sunday and made some interesting observations. Dr. Goolsbee stated that there is only one way to get out of the current economic morass. Most of the country thinks we need to cut expenses or entitlements since it is so clear that we dug ourselves into this mess with excess debt and promises we cannot keep. Dr. Goolsbee believes, as we do, that the only way to extricate ourselves from this situation is by "growing" our way out. He said that we have to shift away from the past economic drivers of the economy (consumer spending and residential construction) to corporate investment and exports. We doubt that corporate investment and exports will be able to substitute for the consumer and housing.
We agree with Dr. Goolsbee that the consumer is so buried under debt that we will not be able to dig our way out of this mess while consumers' are paying off debt (or defaulting on debt) and trying to save more. The household debt more than doubled from $6.5 trillion in 2000 to about $14 trillion in 2008. The deleveraging process then began and household debt dropped to $13.2 trillion now (we expect it to drop below $10 trillion). With the enormous inventory of unsold homes (total of about 5 million including "shadow inventory"), we will not be able to depend upon the housing market to help our economic growth within the next few years.
We find the other comments by Dr. Goolsbee hard to accept, where he states "we need to replace the typical economic drivers with corporate investment and exports to our trading partners." Remember, the consumer makes up over 70% of our economy. In addition, residential construction (and other durable goods orders which come from a new home built and purchased) also makes up a substantial part of the GDP. These two drivers of past recoveries were always the most significant, and we find it hard to believe that without them, there will be any economic recovery at all.
Corporations will not spend money on new plants and hire new employees unless they can clearly see consumer demand, which we believe will not be evident until the deleveraging is complete. Also, business investment makes up less than 15% of our GDP. Exports make up 14% of our economy, but remember, the GDP math subtracts imports from exports, and our imports are greater than our exports. Exports will not be a very good substitute for consumer demand and residential construction (which typically drove us out of recessions in the past) unless the U.S. dollar collapses and we are able to sell our goods and services at large discounts to our trading partners. This is not the magic elixir that we need to dig ourselves out of this dilemma, since there are so many other countries that we will be competing with as shown in the "competitive devaluation" section of our "Cycle of Deflation." Just think about what the Euro Zone and the emerging markets would do as the U.S. forces down the U.S. dollar. China has already pegged the Renminbi to the U.S. dollar just in case we get desperate enough to drive the reserve currency down enough to increase our exports.
Our main point here is that we cannot substitute corporate investments and exports for consumer demand and residential construction. Consumer spending and housing are just too difficult to replace as drivers of the economy. This economy will be very hard to jump-start since the fiscal and monetary stimulus (that will be running-out this year and next) will feel like a tightening to our country. This sure looks like a "double-dip" to us!!
What about Europe?
As far as Europe is concerned, there was another statement from that same show this past Sunday. It came from George Will, a regular guest, "The U.S. Administration and Congress took measure after measure to stop housing from going to its natural level, and it looks as if Europe is making the same mistake with the weaker and more debt-laden countries." It looks that way to us also! In fact, these weaker debt-laden countries and the U.S. have the same problems as we all are trying to implement austerity measures to cure our balance sheet problems, but the final result is even slower growth in our economies.
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