Economic Outlook: How long is recovery in a ‘Humpty Dumpty’ economy?
| December 02, 2011
The good news is that the U.S. economy is growing — with the exception of the housing market — but the bad news is we’ve encountered the worst recession since the Great Depression, says Eugenio Aleman, director and senior economist at Wells Fargo.
“We went from -9 percent to almost 3 percent in almost three quarters,” Aleman explained during his “Construction Industry Economic Analysis & Outlook” presentation at the late October Construction Writers Association in San Antonio, which was attended by Aggregates Manager and Better Roads editors, sister publications to Equipment World. “The only reason it [the economy] recovered is because the U.S. government intervened. During the Great Depression, the government didn’t intervene.”
Back then, the debt was 145 percent, and it’s rapidly approaching 100 percent, Aleman says. Regardless, it’s going to be very expensive coming out of this recession. “What we have done during the last three years, good or bad, left us very close to another Depression.”
And though the recession is technically over, Aleman says the majority of Americans don’t consider the nation as on the way to recovery, particularly because jobs aren’t being created at a rapid pace. “We lost 9 million jobs in two years,” he says. “If you take 9 million jobs time the per capital income, you can see how bad this has been.”
It will take nearly five years to recover 9 million jobs—even though the economy is growing. Typically, the economy can grow at about $200,000 per month. Then the question of underemployment is raised. Is it really underemployment, Aleman asks, or is it just the new economy? “If you extract how many workers are being laid off by the public sector, you have to add 60,000 more jobs.
The duration of unemployment shows a struggling labor market and the biggest issue is that employment isn’t growing at as fast of a pace as necessary to get the country moving. However, consumer prices are beginning to increase so there are higher prices but less work.
The Humpty-Dumpty Economy
The country has grown into what Aleman calls a “Humpty-Dumpty Economy.” Using a twist on the popular nursery rhyme, Aleman quips:
The U.S. economy sat on a wall,
The U.S economy had a great fall,
All the king’s treasury men,
And all the King’s Federal Reserve men,
Couldn’t put the U.S. economy together again.
“We have been on a brick wall for 11 years trying not to fall,” Aleman says. “On one side of the wall there is a 1930s/Japan-like Depression. On the other side of the wall, there is inflation and stagnation, which equals stagflation. It’s going to be tough to pull out of it, but the other side could go on for 20 years.”
It’s a shock because for the last 11 years, the United States has been “throwing money out of a helicopter,” Aleman jokes as he shows a “Helicopter Ben” Ben Bernanke action figure in a helicopter with the slogan, “Now YOU can drop money out of a helicopter.”
The “cash is king” will remain the economic mantra, Aleman notes. “It’s very difficult to get a loan now,” he says. “You have to have a job, you have to have 20 percent down…Banks are turning away customers. They don’t want their money…because lending is no longer a business.”
Aleman refers to the Federal Reserve balance sheet as a “monetary tsunami.” During economic times like this, the Federal Reserve lowers interest rates to reflate the economy. It did this during the last recession, Aleman says, and only one sector reflated: housing. “That bubble burst and we went into a recession,” he says. “That’s where we are now.”
Although new home sales are very depressed, interest rates are at an all-time low, and credit-card lending “is non-existent,” there are some signs of stabilization, Aleman says. “The good news is that the economy is growing,” he points out. “Manufacturing has expanded for the past two years. The service sector is in expansion mode.”
Aleman is also confident that the he housing market, which sets the tone for much of the construction market, will come back. “Home prices are going to come back,” he says. “Don’t ask me when, but they will. We can’t outsource home buying to China so it has to come back.”
A tricky balance
At Better Roads press time, U.S. Sen. John Cornyn (R-Texas) was calling on Congress to adopt “a strong balanced budget amendment (BBA) to the Constitution.” Cornyn, a member of the Senate Budget Committee, says a strong BBA “will treat the disease along with the symptoms. An amendment with too many exceptions and loopholes will not.”
In the Nov. 16 speech before the Heritage Foundation, “Balanced Budget Amendment: Reclaiming Control Over America’s Future,” Cornyn asked the difference between the fiscal challenges the nation’s founders faced and the ones we currently face and then quipped that “the answer is pretty simple.
“Back then, federal government was the solution to the problem. Right now the federal government is the cause of the problem. And the American people understand the difference.”
The U.S. government now borrows more than 40 cents of every dollar it spends, Cornyn noted, adding that “every child born in America today comes into the world as a debtor, to the tune of about $46,000. “Our gross debt is now larger than the entire U.S. economy, which means we are now on the same trajectory as Greece, Italy, and several other nations, and we do not like where that path leads,” he said. (To watch Sen. Cornyn’s speech, go to heritage.org/Events/2011/11/Balanced-Budget-Amendment.)
The question, however, is what form of BBA should be supported: A strong BBA that might now pass the House or a “clean BBA” that wouldn’t incorporate spending and taxing provisions but might be enough to get the two-thirds supermajority vote?
Cornyn holds steadfastly to his support of a “strong bill” and cites two reasons. “First, a strong balanced budget amendment will actually solve the problem. Let’s all remember that the disease in Washington is out-of-control spending,” Cornyn said in his speech. “Big deficits are just a symptom of that disease. As any doctor will tell you, treating the symptoms without treating the underlying cause of those symptoms will likely do nothing to help the patient recover, and could make things worse.
“Second, a strong amendment will reassure financial markets and the American people that we get it. Think about the message that Standard and Poor’s sent us when they downgraded our credit rating earlier this year,” Cornyn added. “The financial markets are looking for a serious, long-term solution to our fiscal issues. They are not looking for more empty promises.”
Go (South)West: Arizona labor market shows modest labor market improvements
The Arizona labor market has begun to show some signs of improvement in recent months, although overall growth remains modest and home prices continue to fall, according to the State Monitor report released Nov. 17 by BMO Capital Markets Economics (Go to bmocm.com/economics for the full report).
The Arizona labor market has picked up recently, with four straight quarterly gains, lifting employment 1.7 percent above year-ago levels in the third quarter. Still, payrolls are a deep 10 percent below pre-recession levels. Manufacturing and construction led the pack with more than a 3 percent increase year-over-year, but after peaking at more than 9 percent of nonfarm payrolls at the height of the 2006 boom, construction now makes up just 4.6 percent of total employment.
According to Steve Johnson, president, Arizona Region of M&I, a part of BMO Financial Group, “We are invested in our clients’ success, and we are continuing to help them navigate this uncertain economy. We provide an unparalleled combination of sector expertise, local knowledge and mid-market focus, all designed to help drive our clients growth.”
The Arizona economy continues to grapple with a depressed housing market. Home sales are continuing to chip away at the housing supply, up 9.2 percent year-over-year in the second quarter. Months’ supply in Phoenix dropped to levels essentially similar to before the downturn – three months in quarter two. Construction activity is extremely quiet, with little sign of momentum.
“The pace of price declines does not appear to be mellowing. Housing starts have averaged fewer than 13,000 through August and are not gaining traction. This compares to peak activity of about 85,000 in 2006,” Robert Kavcic, an economist for BMO Capital Markets, said in a written statement.