There is a wealth of debate surrounding the US economy at the moment. The basic tenets of the debate can be summarised as bulls arguing that the current slowdown is the result of high oil prices whacking consumers and the Japanese tsunami whacking production. Bears are arguing there is a structural problem that these shocks have revealed.
Let’s first examine the bull case. They argue that both the high oil prices and Japanese effects will pass soon. And there is evidence for a crimping of consumption, form Money Game:
Our analysis shows that over the past 18 years, the impact has been somewhat larger—closer to $1.4 billion for every once cent increase. Based on the above relationships, the run-up in energy prices through May lopped between $90 to $150 billion (annualized) off of consumer spending in H1.
Also, 5% or so of US exports go to Japan (under half a % of GDP). And there have been additional impacts from the shut down of some car production following supply chain disruptions.
However, neither of these (especially the latter) is enough to explain the slowdown. The US economy managed to power through higher oil prices in 2007 and 2008. Moreover, the dreadful BLS jobs report form Friday showed a broad-based hiring slowdown.
Whilst oil and Japan are weights, there is clearly something else going on. Which is where we turn to the bear case and Tim Duy:
It is beginning to look like the economy is circling the drain. To be sure, I hate to make too much of one report, but the May employment report comes at the end of a series of bad reports stretching back to nearly the beginning of the year. There looked to be solid hope the recovery was on a better track as 2010 drew to a close, and that momentum appeared to carry through into January. But then we hit a wall.
What wall? Theories abound. Temporary weather and tsnumai induced disruptions for one, but we should be trying to look through such short term events. The crisis in Europe, although to be honest I don’t think this is having much of an impact on the decision making of the average US citizen or firm. I tend to think the rise in commodity prices, particularly oil, was the primary culprit, as consumer spending faltered and businesses struggle to pass increasing costs onto consumers. But what it really comes down to is that we have only had one good quarter in this recovery, and that simply was not enough to provide sufficient resilience to the sheer number of shocks the economy has weathered this year.
That’s right, the underlying economy is weak and shocks simply snuff out any virtuous cycle of spending leading investment and job growth leading spending. Or vice versa.
But we still haven’t got to the source of the weakness. For that, let’s look at a great post today by Barry Ritholz:
Now, what’s most troubling is that among the reasons income is going nowhere is the simple fact that American workers are getting less of the spoils, as clearly evidenced by their “labor share.” We can determine fairly easily what share of the fruits of our labor are coming back to us in wages, salaries, and benefits, as we see here:
…So, where’s the nonlabor share of the equation showing up (see reference above)? How about, in large part, on the balance sheets of nonfarm nonfinancial corporations — in their liquid assets:
And those are the nonfinancial companies that weren’t showered with government largesse and arguably made their money the old-fashioned way: They (presumably) earned it (unlike the banksters).
…I consider myself an ardent capitalist. But what we’ve got now isn’t capitalism — it’s some warped perversion of capitalism that is leading us to a very troubling place. As long as Congress continues to play Jerry Mahoney to corporate America’s Paul Winchell, color me decidedly dour on the outlook. The parasite has almost killed its host.
This is what Sell on News has been pointing to for the past week. The accumulation of debt by households has hidden a transformation of the US economy from industrial powerhouse to corporate host. Now that its corporations have shifted production elsewhere, the debt remains but the jobs have gone. Profits are terrific but unsustainable because there is no scope for a virtuous economic cycle at home unless labour gets its share of national profits for demand growth.
The US still needs to find a new, external source of demand. Sooner or later, QE3 is coming.