WASHINGTON – Ultra-contrarian David Stockman (davidstockmanscontracorner.com) is warning us that the tepid economic recovery America has enjoyed so far, modest as it is compared to our historic average, (growth a bit above 2% a year), may be about to end.
Average recoveries
Indeed, history is on his side. US post war recoveries lasted on average for 61 months. Just a few went much further, but they are the exception. We are now in month 74 of the Obama recovery, significantly above average. How much longer have we got?
Too much debt
Not much according to Stockman, simply because the US consumer is still over leveraged. Let’s remember that the average American got into the 2008 recession with massive amounts of debt. That load is a bit lighter today, but it has not vanished. Clearly an indebted consumer cannot spend much. And tepid consumer spending means (at best) slow growth in an economy in which consumer spending amounts to more than 70% of GDP.
Lower consumer spending
As Stockman put it: “The reason for the tepid [consumer spending] trend is not hard to identify. Most households are still not in a position to increase their leverage, and are therefore constrained to spending what they earn…Accordingly, it should come as no surprise that July was the third month in a row in which the average American spent less than they did in the same month a year ago, as recorded in a Gallup Daily consumer spending survey. Indeed, of the seven months in 2015, five have seen a decline in consumer spending year over year.” [emphasis in the original].
Got that? Consumer spending was not that robust to begin with. And now it is actually declining. This does not look good.
Excessive public debt
More broadly, America as a whole is suffering under the weight of a combined US $ 59 trillion public and private debt. Therefore, do not count on the Federal Government for more stimulus. While the annual deficits are down from the horrific trillion dollar plus of the early Obama years, we are still in the red. In the meantime, Washington accumulated a colossal US $ 18 trillion in total debt. There is just no room for any significant debt-funded spending expansion.
More exports?
Well, what about exports? Will they save us? Not really. US exports are declining, in part because of a rising dollar that makes US goods more expensive, and in part because the world has been hit by a gigantic wave of Chinese and Asian excess capacity sold at rock bottom prices.
In Stockman’s words: “So what we have now is staggering excess capacity on a planet-wide basis. That means gale force deflation is being propagated outwards from China and its supply base as they desperately attempt to ship materials and goods at any price which will produce positive cash flow after variable costs, and thereby service the towering pyramids of debt that have been erected in the last two decades”.
Glut from China
Well, colorful language aside, Stockman is probably right. China’s slow down means that the Beijing leadership needs to unload massive amounts of excess capacity into other markets. And we already see the impact of increased amounts of ultra-cheap imported Chinese steel. They are causing economic devastation in the US steel sector.
Given these trends, hard to think of an export-led buoyant recovery going on and on.