We may be there yet
By Daniel M. Ryan
Although the U.S. economy is not out of the woods yet, there have been several encouraging items last week indicating the end is near. Two of the earlier reports, disclosing February home sales rising 5.1% and durable-goods orders jumping up 3.4%, are iffy. Both of these jumps followed unexpectedly large declines in January. When looked at one way, neither of these two February surprises were trend-changers. They just restored the previous bottom-scraping after an unusually dolorous January. In and of themselves, they don't show a nascent rebound as of yet. When looked at in another way, though, they show an aborted panic that began in January and ended in February.
Later last week, it was revealed that consumer spending was up even though total personal income was down. This juxtaposition is less cheery than clueful. We're supposedly living in a new era of savings, as indicated by the U.S. personal savings rate jumping above 4% and holding there. President Obama has jumped on the savings-and-retrenchment bandwagon. The case that's in the back of everyone's mind, of course, is Japan.
Comparing the U.S. now to Japan in 1990, though, now misses an important cultural difference…perhaps a crucial one. The Japanese have a long-standing culture of saving; back when "Japan Inc." was the attention-grabbing juggernaut, Japan's high growth was attributed somewhat to a high savings rate. We haven't heard much about it in the last two decades, but the culture is still there.
This is the difference which, I believe, will be crucial for the America-isn't-Japan case: When the Japanese debt bubble imploded, the Japanese were pushed back in to frugality. This frugality has hobbled GDP growth in the country, and largely explains a long, trying but steady return to normalcy. Like the penitent debtor who pays down slowly while gamely accepting a lowered standard of living, the Japanese have endured the "Lost Decade." The associated homilies are those lapped up by savers at heart.
In contradistinction, Americans have been pushed from a culture of spending. Although a zero savings rate has only been a recent anomaly, it was not an aberration. It was the culmination of a trend that saw the savings rate inch steadily lower. The postwar culture of savings America had was the result of the Great Depression. As the public became more convinced that a repeat wouldn't happen, the savings rate dipped significantly. Hence, any culture of savings America has is part of a culture of hard times. It's not part of good-times America, and had only a tenuous connection with normal-times.
Stories of penitential consumers do make for exciting Bonfire of the Vanities morality tales, but that kind of Savoranola was never that popular in America. It's more plausible to expect a temporary retrenchment – a stay in the storm cellar – followed by a return to the usual freewheeling. The dissaving extravaganza is unlikely to be repeated, as it takes an asset bubble with wide participation to make it possible, but the New Era of Frugality will likely fizzle. I believe that the above-noted disjoint between rising consumer spending and lowered personal income is a foreshadow.
The money supply is still growing at a rapid clip, and the post-crisis slowdown in its growth has been lesser than in other recessions. Both M1 and M2, on a 13-week basis, are growing at double-digit annualized rates. The price series tracked by the Bureau of Labor Statistics show some improvement at both ends of the economy, if not yet the middle. Although February's core finished-goods rate dropped from January's 0.4% to 0.2%, it's still positive. Other series were disappointing, but core crude goods was positive too: +1.5%, as compared with January's 0.1% gain. This gain shows the effect of reflationary government policy, rather than a consumer-led recovery which trickles from finished goods to raw materials. Nevertheless, it shows that reflationary policy is beginning to work. More particularly, "Dr. Copper" is still recovering with nary a plunge-back.
There still are signs of nascent recovery, or evidence of an advanced troughing phase. That's good news, except perhaps for Republicans hoping for an "Obama recession." 2010's Republican candidates will likely be running against an "Obama recovery." It looks like the deficit issue has the stronger pair of legs from this vantage point…
…unless Ben Bernanke can be plausibly painted as a stealth Republican, or closet inflationist.