U.S. Economic Recovery Gains, but Headwinds Persist

Analysis

 @JosephLazzaro
on January 05 2012 4:07 PM
A worker does quality checks on razor blades manufactured at Gillette's factory in Boston
A worker does quality checks on razor blades manufactured at Gillette's factory in Boston, Massachusetts December 5, 2011. REUTERS

Historically, forecasts accompany the new year the way happiness accompanies a couple on their wedding day.

With the above in mind, while several monthly and quarterly economic data points have prompted analysts to up their 2012 U.S. GDP growth forecasts -- arguing that the economic recovery is gaining momentum -- investors/readers should also remember several long-term variables that will continue to work against the recovery -- complicating policy makers' efforts to eliminate the United States' large jobs deficit of at least 11 million full-time jobs. (The job deficit is much larger if one considers discouraged unemployed Americans, who have given up looking and are not counted by the U.S. Labor Department as being unemployed.)

Here are five reasons why the slow-growth conditions might continue:

1 Housing sector doldrums - The housing overbuild and the subsequent bust means it will probably take at another year to work off excess inventories in single-family homes, condos, co-ops etc.

What's more, slumping prices will cause some families who would typically trade up to stay put -- eliminating additional sector activity. As a result, housing invariably will not be as strong a U.S. GDP growth engine as it historically has been during previous expansions.

2 Demographics - The low birth rate and immigration's inability to keep population growth trending at a high level will have implications for sectors.

The U.S. population is aging, and its largest generation, the post-World War II Baby Boom generation, is starting to retire. That implies even less consumer spending, as adults typically decrease spending in their retirement years.

3 Export traffic jam - In general, U.S. multinational corporations are well-positioned, from product quality, market position and distribution network standpoints, for the global economic expansion.

In other words, U.S. corporations are lean, productive and ready for battle. The problem is, however, is that many foreign-based competitors are too. Moreover, dozens of formidable emerging market nations have export-dominant economies: they have to export to grow. Hence, the current global expansion will probably likely feature a surplus of goods (at least initially), and intense competition. That's likely to keep U.S. export revenue below what it would be without those surplus goods, limiting the tailwind from exports to U.S. GDP. To be sure, the U.S. manufacture's expansion continues to impress -- with an array of high-value-added manufactured goods like jet engines and heating/air conditioning systems -- but that high-end manufacturing advantage may not be enough to offset the surplus goods factor.

4 U.S. budget deficit reduction - Spending for the bank bailout, related financial system measures, and the fiscal stimulus package will have to be paid for. In addition, health care reform will limit entitlement spending growth in Medicare and Medicaid, but additional spending cuts and tax increases will be needed, and more resources will be removed from the private sector. Net result? Historically, tax increases have constrained U.S. GDP growth, at least in the beginning of their implementation.

5 Frugal consumers - This will likely be the most important factor if the new normal, slow growth U.S. economy takes hold. 

Americans are in the midst of making up for a decade of unsustainable over-consumption -- spending fueled in many cases by debt; as a result, Americans have increased savings.

Currently, Americans are saving at about a 3.5 percent annual rate, but it did approach 5 percent earlier in the expansion. Also, asset declines in stock portfolios and homes are further impressing on upon Americans of the need to save: that projected large 401k or home appreciation bonanza in 10-20 years may not be large as one had hoped for. As a result, because consumer spending accounts for roughly two-thirds of the U.S. economy, a sustained reduction in consumption will weigh on GDP growth.

Economic Analysis: One of the best commerce and credit minds of our time, PIMCO's Bill Gross, who leads the world's largest bond fund, has forecast a new era --  a capitalism with limits that will feature lower return-on-equity, lower GDP growth and smaller job creation. He's not the only one forecasting a U-shaped, or mild, economic recovery.

What could critique the above and enable the United States to experience robust 6 percent GDP growth in the expansion's initial stage, and above 3 percent thereafter? That's a good question. There are no 6 percent initial expansion stage forecasts, but the key to achieving it concerns the appearance of a domestic catalyst -- a growth engine(s) that really adds to job growth.

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