Editor's choice

Signs point to slow growth

September 13, 2009 

Campbell R. Harvey, the J. Paul Sticht Professor of International Business at Duke University's Fuqua School of Business, writes a blog on the economy ( http://dukeresearch advantage.com/author/charvey/ ). Here are some highlights from a recent post:

Given the decrease in job losses and other favorable (or less bad) news, it appears as if the economic storm is abating -- or is it the calm that you feel when the eye of the hurricane passes over?

There is unambiguous information that the rate of job losses is decelerating. "Only" 216,000 jobs were lost in August. The unemployment rate increased to 9.7 percent due to three reasons: (a) the job losses in August; (b) a revision upwards in the job losses in July; and (c) new people entering the labor force -- perhaps re-entering after a prolonged period of unemployment.

However, in my opinion, there is very little to call "good news" here.

Let's summarize:

We have lost 5.02 percent of the labor force to unemployment during this recession, over 6.9 million jobs.

This is now the worst episode in the post-WWII period. (This month it became worse than 1948.)

This is not the end. Remember the government stress test has the "worst case scenario" of 10.3 percent in 2010. We are getting close to that now.

We have yet to see the peak in foreclosures and defaults in both residential and commercial real estate. That should happen sometime in 2010.

We will see surprisingly positive growth in the third quarter, and people will declare the recession over.

Even if such declarations are true, we are not out of the woods. The combination of three economic forces will slow growth in 2010:

A new wave of stress on the financial system due to surging defaults on prime mortgages and commercial real estate.

The continued constraints that small- and medium-sized businesses face in getting credit. These businesses drive employment growth.

Little or no action from consumer spending -- which represents 70 percent of GDP. Consumers need to protect themselves by saving. No job is safe right now.

Let me comment a bit on the consumer. The consumer has taken multiple body blows:

A dramatic wealth hit due to degradation in the value of their main asset -- housing. Indeed, for most homeowners with mortgages, their equity has been wiped out (or negative).

A wealth hit due to a drop in the value of other holdings, like 401(k)s.

Unemployment and fear of potential future unemployment.

Unease over future obligations as the government racks up record deficits and debt.

You put this all together, and it seems unlikely that the consumer is going to be the engine of the recovery. Savings rates were driven to very low levels during good times. This recession is shockingly bad, and it caught most consumers by surprise. Indeed, we really haven't had a deep recession in almost 30 years -- people forget.

The result is caution. Consumers will build their savings for three reasons. First, many fear losing their jobs -- or being paid less in the future. Second, the savings were close to zero to start with. Third, they want some insurance for the future.

All of this spells slow growth.

I am not sure when they will officially date the end of the recession. I had originally forecast the end of 2009. However, the more important issue has to do with growth prospects going forward.

The data will be difficult to interpret. We will see strong third-quarter growth that is really due to government spending (which cannot be indefinitely maintained) and some inventory adjustment (firms have let inventories run so low that there needs to be some production to restock). Neither of these positive forces is sustainable.

While I am more pessimistic than most, let me say something optimistic. The Unites States is in far better shape than European countries or Japan.

So while this might seem for the U.S. to be a painful period of slow growth, we will gain ground globally with respect to other developed countries.

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