PIMCO: US recovery will be anything but normal
Filed under: Economy, Investing, Earnings
Is the United States economy about to be relegated to a decade of European-style slow-growth? (Hey, at this rate -- given our 18-months-and-counting recession, we'll take any GDP growth, man.)In a note to clients of PIMCO, the world's biggest bond-fund manager, strategic advisor Richard Clarida said the U.S. recession may end this year, but there will be no "traditional postwar recovery."
U.S. as "caboose," not engine, of growth
At some point, as the global financial system stabilizes, credit growth should resume, Clarida wrote. However, the "new normal" financial and economic environment, with demand for private credit growing at or below the pace of nominal GDP growth, means the global economy needs to be prepared for the U.S. "to be the caboose of the global growth train for at least the next five years," Clarida wrote.
Deleveraging is inevitable, he added, but the consequences will largely depend on how readily and effectively the rest of the world can become the engine.
Further, Clarida on Thursday told Bloomberg Radio that the U.S.'s 6.9 percent savings rate -- a 15-year high -- underscores why the world can not expect our national economy to be the major engine of global growth.
"The consumer has got religion," Clarida said. "In an economy where consumption has been the driver of normal growth, that will be an enormous headwind." Historically, consumer spending has accounted for approximately 60 percent to 65 percent of U.S. GDP.
Dilemma for U.S. -- and the world
A decade of public policy errors has created a dilemma for U.S. policymakers, business executives, and citizens. It's a variant of John Maynard Keynes's paradox of thrift (or savings).
After a decade of overconsumption, and with their nest eggs depleted by the stock market and housing slumps, Americans need to save more. And so far, they are, as evidenced by the high savings rate. But at the same time, the U.S. needs at least selected consumers to spend and stimulate the economy. How an economy can simultaneously increase its savings rate and consumption to increase GDP constitutes the dilemma. There's scant economics literature to suggest a nation can successfully pull it off, and if Clarida's analysis is correct, the road ahead is that "new normal," or a U.S. GDP growth rate in recovery stage of about 2 percent -- a European-sized growth rate -- and far below the 5 percent to 7 percent GDP growth that developed economies typically register in the early stages of a recovery.
Further, the International Monetary Fund echoed as much in its most recent report, revising its 2010 global GDP growth forecast to 2.5 percent, up from 1.9 percent -- but underscoring that the recovery, particularly in the U.S., is expected to be sluggish. The IMF added that, given weak demand in the U.S. and in other current account-deficit countries, "policies need to sustain stronger demand in key surplus countries."
Economic Analysis: With PIMCO and the IMF -- two organizations that approach GDP and economic analysis from decidedly different vantage points -- both concluding that the world cannot count on the U.S. recovery to create sufficient demand, there's a preponderance of evidence suggesting that the rest of world must generate demand to fill the gap created by the "frugal consumer" U.S. The era of "make the best and ship it to the West" is long over. For the global economy to grow at an adequate rate, middle-class and working-class citizens in China, India, Japan, Brazil and Latin America, Russia and Eastern Europe, and Western Europe must consume more.
Disclosure: Lazzaro has no positions in stocks but does own shares in two PIMCO Bond Funds: PHDAX and PYMAX.
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Reader Comments (Page 1 of 3)
7-09-2009 @ 8:22PM
DirectionDd said...
Huh, now were the caboos and were waiting for someone else to determine our future. Thats B.S. this country is better than that. I'll say it again, fire all of them, we don't need this much government. If you want this economy to grow, get the damn government out of the way, and just watch what the american people do. obama, please lower the coorporate tax and unleash our private enterprise. You said it yourself, you want america to start building again. Give the american business some incentive. PLEASE
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7-17-2009 @ 1:20PM
michctr said...
you are correct.the people need to vote the elite crud out of office now,pelosi who rides her ass back and forth to califorky in a boeing 747 at taxpayer expense to impress herself.please vote this bunch out..
7-09-2009 @ 8:42PM
Greg said...
Replacing the dollar as reserve currency
Reuters
July 8, 2009
The U.S. dollar is in the line of fire as leaders from the largest developed and developing countries gather in Italy for talks, as China pushes for debate on an eventual shift to a new global reserve currency.
Sources have said the dollar’s role probably will not be included in the final communique of a G8 meeting. Even if it does rate a mention, the language used would likely be extremely general to avoid destabilizing financial markets.
http://www.infowars.com/replacing-the-dollar-as-reserve-currency/
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7-09-2009 @ 9:03PM
Jerry said...
It is ridiculous to believe that the average american is now saving 15.9% of his income and to use savings as the reason consumer spending is down. Rising costs for services the consumer must have such as energy, medical and education leaves the consumer with no descretionary income to spend. That is the GDP is down. True is the fact that less american consumption will inpact other countries negatively. To expect them to take over as consumer engines is impossible. Until a brand new job providing industry is created, not one that kills off another but NEW, every nation will become a caboose. The US, having enjoyed a high standard of living will feel the pain as our living standard goes south.The Amish lifestyle will look like a rich man's paradise. The zenith of our standard os living was built on credit. Other countries do not have the same credit system. Credit in America is drying up--another reason why we are heading for the endof the train. Simply put "we ate up the sails" and now we are dead in the water.
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7-09-2009 @ 9:54PM
thec2u said...
Well Said! Amen.
7-09-2009 @ 9:13PM
ajgorm said...
as the global financial system stabilizes the "new normal" financial and economic environment, with demand for private credit growing at or below the pace of nominal GDP growth, means the global economy needs to be prepared for the U.S. "to be the caboose of the global growth train for at least the next five years," Clarida wrote.
==>>CHooOO CHooOOOo puTTtt PuFFff gone GOOD BYE dont count on us to be the caboose the question is will CHINA be the engine.
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7-09-2009 @ 9:26PM
Greg said...
Blaming the American consumer for our sluggish growth is baloney. The proper blame is with the Obama-led government which is actively thwarting our private sector with taxes, regulations, and interference. I found it very curious that the article suggested a time frame of 5 years. That sounds like the remainder of Obama's term and a year or so for the economy to spool up under a new pro-business president.
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7-10-2009 @ 10:24AM
charlie said...
really? Was he in office 18 months ago when the village idiot was asleep at the switch? its funny how you right wing idiots revise history even though the facts are in your face. This mess was inherited by Obama from a totally corrupt ineffective government. much as Clinton took over after the village idiots father did much the same thing in the late 80's and Reagan and his trickledown econmoics did before that. I dealt with 1989 when the world came crashing down and the housing market, as it did LAST YEAR WHEN BUSH WAS IN OFFICE, flipped. people lost their homes, or those that did not lose them found out that their homes were worth less than when they started. The last 3 recessions have all been caused by pisspoor republican policies run by inept presidents. I lost my job of 15 years back in December because the idiots on the right still think their way of government works. Its obvious it does not. So try looking at the facts instead of spewing more lies. It took that moron bush 1 year to turn a surplus into a deficit and my damn taxes went up 6 bucks a week. The GOP is a fail. It does not work.
7-09-2009 @ 9:30PM
John Feltman said...
Once again, let me tell you like it is:
Over a year ago ,I predicted the Wall Street collapse because of the manipulations taking place in the Oil Futures
Market and the resulting $5/gal gasoline and heating oil
that caused the collapse of the sub-prime mortgage market due to a 700 billion dollars reduction in buying-power via the $140/barrel crude price. And major banking institutions found themselves in need of a bailout by Uncle Sam. And we all watched in horror as our auto industry was also in the state of bankruptcy. Unfortunately, there is nothing to indicate that the Depression,that we are now in,will soon be over. In fact unemployment will soon hit double-digits and bankruptcies will hit an 8,000/month rate. So,where is the market heading? It will probably test 6000 on the DOW and, hopefully, hold above that level. Whatever, it won't be pretty. And the economy is not going to recover for at least 3 years,if then. We are in deep trouble and the comments being made by so called analysts on Wall Sreet should never be taken seriously. These are the same people who were still churning accounts while it was evident to people like myself who can do the math,that the financial world was about to collapse. Read Serpent on the Rock by Kirk Eichenwald and you will understand what I lived through for 22Years. There are two major crisises that face us. 1.The collapse of the U.S dollar because of the world perception that our economy can no longer support our debt. This will force the Fed to significantly raise interest rates which will deepen our Depression and cause panic across the world.
2. Israel will attack Iran and the world could possibly witness the first nuclear weapons being used since WW2. This could easily result in WW3 with all its negative effects on human life across the world. The one positive in this scenario is that the U.S.,Russia,England and Germany will be forced into an alliance that will secure all crude resources by overwhelming military force that will destroy
the Arab world as we now know it. An attempted intervention by China will be suppressed and will decide to join the alliance.World order will be once again achieved. The U.S. economy will ,once again ,be revitalized by war,and the world alliance will replace the U.N. and remain strong as a result of the tremendous achievements that it was able to accomplish as one. Sound like a prophecy?
It is.
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7-10-2009 @ 6:53AM
Kelly said...
John, this does not sound like a prophecy, it sounds like history. I feel as if I am living in the 1920/30/40's when the US went into isolation and dug it's head into the sand until it got kicked in the butt by Japan. However, instead of Germany being the instigator, Iran is. The Axis powers will be Iran, Venesuala, and North Korea. Yes, Isreal will attack if they feel they are pushed into a corner and nobody will willing to take a political hit and help (sounds like today so anytime soon it will happen - not prophecy, common sense). Yes, nuclear weapons will be used because unlike Iraq where Sadam let us think he had nuclear weapons, we know Iran has them. Our dollar is very weak right now with no fix in sight and Congress is talking more bailouts - can you $1000 loaf of bread? It happened before in Germany, it can happen here. So for you, it might be prophecy but for me, it's history repeating itself.
7-10-2009 @ 10:30AM
Sarah said...
Americans are just buckling under and caving in quietly. They keep saying yes to everything. They group live still paying outrageous rates, and maintain the high charges for housing, instead of saying no, or at the most slightly lower it by having to move back in with their parents. Alot of housing is just being bled dry and it's already paid off, or if they keep it up, they make every single expense come out of their customer, when it's really the cost of their investment which they own.
Since there's been no men to say no, since they've gotten all of that free money from women working, most everyone is paying twice as much as they should be for housing, even if they are group living.
When men had to pay all of their bills on their own they were financially responsible and kept all costs down.
7-09-2009 @ 9:32PM
ajgorm said...
what is the "new normal " that is what I would like to know ? 5 years that is when Madoff will be let out of prison for lack of State Prison FUNDS to house criminals . Maybe he wont like it on the outside the way things sound we will all be taxed to death..
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7-09-2009 @ 10:02PM
Economyparty said...
The government shoud have stayed the heck out of private enterprise. Look at all the billions thrown away on GM on a knee Jerk reaction of a very unexperience President. For all the good it did. Our country is in bigger trouble than anyone can imagine. Mark my words...the worst is yet to come.
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7-09-2009 @ 11:08PM
tim epstein said...
To put blame on our president that has been in office ffor six months is a myopic stupid deduction; plain and simple! You are a boxed in person, but loyal to your ideas to the end, your end. America's problem is obvious to me, it's the system: The entire system! I mean, how long did we think it could last. A system without separation of economic classes will crumble, and revolt might be next. America is a country where one pecent owns ninety percent. America is not a capitalistic country, it's something else. You people bought that line! It seems that drastic, 'out of the box' ideas are needed, not conservatism (Keeping the status quo) and or worrying about taxes. Perhaps we needed this to happen so we won't be so arrogant myopic and loyal to ideas of the past. Everything that once was is forever gone. I'm glad actually, we can do better. We'll eventualy all do better, if we forget, stop worshiping people and ideas that happened yesterday. We must carry on ---togther.
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7-10-2009 @ 5:41AM
Scott said...
start a commune then tim
7-09-2009 @ 10:58PM
v.j.demarco said...
Every economic projection,no exceptions must be based on the number of persons working and actually paying taxes,not receiving a government check. Without job growth there will be no recovery.Where will the jobs come from? What type of jobs are we hoping for? Our great leader talks constantly about millions of Green jobs will be created after he destroys the coal and oil industry. The concept of Green jobs and Earth Warming are the two greatest lies ever conceived by our elected leaders.Until new jobs are created,whatever that means,this country will only go in circles from one government created crises to another.Governments do not create real jobs,they destroy them.I call this spinning Gold into Straw.
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7-10-2009 @ 3:22AM
Captain Ron said...
Every economic projection,no exceptions must be based on the number of persons working and actually paying taxes,not receiving a government check. Without job growth there will be no recovery.Where will the jobs come from? What type of jobs are we hoping for? Our great leader talks constantly about millions of Green jobs will be created after he destroys the coal and oil industry. The concept of Green jobs and Earth Warming are the two greatest lies ever conceived by our elected leaders.Until new jobs are created,whatever that means,this country will only go in circles from one government created crises to another.Governments do not create real jobs,they destroy them.I call this spinning Gold into Straw.
wow you be right
7-09-2009 @ 10:59PM
tim epstein said...
Dear Jonn Feltman,
Your prophecy seems very exciting. I like it. You comment is very informative. But, correct me if I'm worng, I've read that our world's oil reserves will be depleted in about twenty years. What's your take on that?
Sincerely, tthackie
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7-10-2009 @ 1:09AM
John Feltman said...
Dear Tim: Thanks for your comments! The known and best estimates of most petroleum geologists is 100 years +(using what is called the growth factor). U.S. requirements will be reduced by 60% in the next 15 years ,because of increased efficencies in combustion engines and the development of alternative fuels and power generating devices such as solar,windmill,geothermal,nuclear,etc. The big breakthroughs will come through projects already being implemented in the biomass fuel derivatives field. Such a project is about to happen in Maine with the conversion of a Kraft paper,black liquor process into chemical derivatives
like ethanol and higher complex derivitives that will not only eliminate pollution through the paper pulp process but produce 'clean fuels' that are nature renewable and non polluting. It's all about to happen, Thank God for our human resource of very brilliant scientists and engineers who are very dedicated and love what they are doing. There is hope.
7-10-2009 @ 1:36AM
Loyd Reddig said...
The hype of peak oil already being reached is just that. We have at least 100 years of oil and up to 300 years of natural gas in proven reserves. That is about enough time to develop viable energy sources. natural gas is the cleanest bet for now. Coal will virtually be owtlawed by the enviromentalist before their demise.