I read a lot of articles, tweets and commentary about the state of the American economy. Seldom do I feel, however, that I understand where we really are or likely to go. Last week, however, I think I got there. I was one of a dozen or so leaders brought together by Audrey Choi, Morgan Stanley’s Head of Global Sustainable Finance, as part of a social sector advisory group. Morgan Stanley’s Chief U.S. Credit Strategist Greg Peters provided one of the most cogent analyses of the US economy that I have heard in years so thought it was worth sharing some of the highlights. Apologies to Mr. Peters for any inaccuracies. These were my takeaways:
The Lost Decade . Many people refer to the decade or more that Japan ‘lost’ after its severe recession and worry that we are in the midst of one as well. Five years after the 2007 recession, with growth at about 2% per year, we may not ‘lose’ the decade but we should assume that the same economic conditions are likely to last a few more years. Pretty reliable data shows that recovery post-credit bubbles take 5-7 years to overcome. We’re on track for that.
The Federal Budget ‘Cliff’ Coming at Year End . Congress' failure to reach a Grand Bargain on the budget last year put us on a course for automatic budget cuts equaling 4% of the GDP if no action is taken post the November election. Simply put, if no agreement is reached, with only 2% GDP growth expected this year (and next) and a 4% GDP reduction from the budget cuts, we will throw the US economy into a self-inflicted, guaranteed tailspin.
Our Economy Has Unique Strengths in the Longer Run . Mr. Peters was more bullish on the US in the longer run, especially against other nations, for three key reasons: (1) all data points to a ‘normalizing’ of wages around the world, making US wages more competitive. He sees a lot of signs of companies moving manufacturing jobs back closer to their markets which would be significant for the US; (2) manufacturing in the US is back on the rise and an important area of focus and growth; and (3) our population and demographic growth. While our ‘replacement birth rates’ are low like in other countries, our ‘household formation rates’ continue to rise, largely from our immigration strength.
Unprecedented Exogenous Factors . When asked if there was a chance that the economy could ‘surprise’ us with greater than 2% growth, Mr. Peters responded that the surprises really are more likely to be on the downside. He said that he had never seen a time when so many ‘exogenous’, non-economic, factors that could not be estimated, could dramatically affect our economy. He pointed to Congress' own inability to act this year, China’s political condition, and Europe’s economic crisis, to name a few.
Real good food for thought.