Stephen Roach Warns "Anyone Trumpeting A Faster US Recovery Is Playing The Wrong Tune"

Tyler Durden's picture

Authored by Stephen Roach, originally posted at Project Syndicate,

Financial markets and the so-called Davos consensus are in broad agreement that something close to a classic cyclical revival may finally be at hand for the US. But is it?

At first blush, the celebration seems warranted. Growth in real GDP appears to have averaged close to 4% in the second half of 2013, nearly double the 2.2% pace of the preceding four years. The unemployment rate has finally fallen below the 7% threshold. And the Federal Reserve has validated this seemingly uplifting scenario by starting to taper its purchases of long-term assets.

But my advice is to keep the champagne on ice. Two quarters of strengthening GDP growth hardly indicates a breakout from an anemic recovery. The same thing has happened twice since the end of the Great Recession in mid-2009 – a 3.4% average annualized gain in the second and third quarters of 2010 and a 4.3% average increase in the fourth quarter of 2011 and the first quarter of 2012. In both cases, the uptick proved to be short-lived.

A similar outcome this time would not be surprising. Indeed, much of the acceleration in GDP growth has been bloated by an unsustainable surge of restocking. Over the first three quarters of 2013, rising inventory investment accounted for fully 38% of the 2.6% increase in total GDP. Excluding this inventory swing, annualized growth in “final sales” to consumers, businesses, and the government averaged a tepid 1.6%. With inventory investment unlikely to keep accelerating at anything close to its recent rate, overall GDP growth can be expected to converge on this more subdued pace of final demand.

That gets to the toughest issue of all – the ongoing balance-sheet recession that continues to stifle the American consumer. Accounting for 69% of the economy, consumer demand holds the key to America’s post-crisis malaise. In the 17 quarters since “recovery” began, annualized growth in real personal consumption expenditures has averaged just 2.2%, compared to a pre-crisis trend of 3.6% from 1996 to 2007.

To be sure, there were indications of a temporary pick-up in annual consumption growth to nearly 4% in the fourth quarter of 2013. Yet that is reminiscent of a comparable 4.3% spurt in the fourth quarter of 2010, an upturn that quickly faded.

The lackluster trend in consumption is all the more pronounced when judged against the unprecedented decline that occurred in the depths of the Great Recession. From the first quarter of 2008 through the second quarter of 2009, real consumer spending plunged at a 1.8% average annual rate. In the past, when discretionary spending on items such as motor vehicles, furniture, appliances, and travel was deferred, a surge of “pent-up demand” quickly followed.

Not this time. The record plunge in consumer demand during the Great Recession has been followed by persistently subpar consumption growth.

This should not be surprising. The American consumer was, in effect, ground zero in this horrific crisis. Far too many US households made enormous bets on the property bubble, believing that their paper gains were permanent substitutes for stagnant labor income. They then used these gains to support a record consumption binge. Compounding the problem, they drew freely on a monstrous credit bubble to finance the gap between spending and income-based saving.

When both bubbles burst – first housing, and then credit – asset-dependent US consumers were exposed to the American strain of the Japanese disease first diagnosed by Nomura economist Richard Koo.

Koo has stressed the lingering perils of a balance-sheet recession centered on the corporate sector of the Japanese economy; but the analysis is equally applicable to bubble-dependent US consumers. When the collateral that underpins excess leverage comes under severe pressure – as was the case for Japanese businesses in the early 1990’s and American consumers in the mid 2000’s – what Koo calls the “debt rejection” motive of deleveraging takes precedence over discretionary spending.

The Japanese parallels do not stop there. As research by the economists Richard Caballero, Takeo Hoshi, and Anil Kashyap has shown, Japan’s corporate “zombies” – rendered essentially lifeless by their balance-sheet problems – ended up damaging the healthier parts of the economy. Until balance sheets are repaired, such “zombie congestion” restrains aggregate demand. Japan’s lost decades are an outgrowth of this phenomenon; the US is now halfway through the first lost decade of its own.

Indicators of US balance-sheet repair hardly signal the onset of the more vigorous cyclical revival that many believe is at hand. The debt/income ratio for American households is now down to 109% – well below the peak of 135% reached in late 2007, but still 35 percentage points above the average over the final three decades of the twentieth century.

Similarly, the personal saving rate stood at 4.9% in late 2013, up sharply from the low of 2.3% in the third quarter of 2005; but it remains 4.4 percentage points below the average recorded from 1970 to 1999. By these measures, American consumers’ balance-sheet repair is, at best, only about half-finished.

Optimists see it differently. Encouraged by sharp reductions in households’ debt-service costs and a surprisingly steep fall in unemployment, they argue that the long nightmare has finally ended.

That may be wishful thinking. Plunging debt service is largely an outgrowth of the Fed’s unprecedented zero-interest-rate policy. As long as the stock of debt remains excessive, consumers will dismiss the reduction in interest expenses as nothing more than a temporary subsidy from the Fed.

Moreover, the decline in unemployment largely reflects persistently grim labor-market conditions, which have discouraged many workers from remaining in the labor force. If the labor-force participation rate was 66%, as it was in early 2008, rather than 62.8%, as it was in December 2013, the unemployment rate would be just over 11%, not 6.7%.

Yes, there has been some progress on the road to recovery. But, as Carmen Reinhart and Ken Rogoff have long documented, post-crisis healing is typically slow and painful. Notwithstanding the Fed’s claims that its unconventional policies have been the elixir of economic renewal in the US, the healing process still has years to go.

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unrulian's picture

The trumpets I hear are for a completely different reason

Levadiakos's picture

This is the 2nd story about trumpets I've seen today:


BERLIN (Reuters) - Methane gas from 90 flatulent cows exploded in a German farm shed on Monday, damaging the roof and injuring one of the animals, police said.

High levels of the gas had built up in the structure in the central German town of Rasdorf, then "a static electric charge caused the gas to explode with flashes of flames," the force said in a statement.

One cow was treated for burns, a police spokesman added

Professorlocknload's picture

Might be a good idea to ban open flame around Manhattan for that reason?

onewayticket2's picture

those arent trumpets.  they are the horns of oncoming tractor trailors. 

krispkritter's picture

Self-roasting cattle,  Awesome idea! Just hang a bag of potates around their neck and poof, dinner on the hoof...

DosZap's picture

a surprisingly steep fall in unemployment


Uh, just OFF the rolls reporting, they are home witout a prayer for a decent job.And check out the LAYOFFS upcoming, peddle this MANURE elsewhere idiots.A THIRD of the workforce is SITTING, and a THIRD is retired or on welfare,and many other Gov't progs.And a THIRD is supporting the 2/3rds for the most part.

Who the hell do these folks think they are kidding?, Themselves?.

Winston Churchill's picture

Grandpa,grandpa, whats a recovery ?

NoDebt's picture

It's the happy name you give to a really bad thing so you don't jump off a bridge (which you didn't build) just thinking about it.

Sudden Debt's picture

it's when grandpa needs to wait 15 minutes to give grandma a second round!

Shad_ow's picture

it's when Obama needs a minute to think of something new to screw us.


moonman's picture

 For recovery any man would give his only begotten son.


i_call_you_my_base's picture

There is also the fact that the GDP calculation is bullshit.

NoDebt's picture

A balance sheet recession?  I guess that's the polite name for "Depression" these days.

kodachrome's picture


Check out this ponzi scheme.

Seems groundfloorish so I put a little bit in for speculation.

Except, can you call it a ponzi if it's blatently expressing itself as such? New investors pay out the old ones? I am curious to see how far this thing goes before it blows.

W74's picture

You want some of us here to plop down a bit o' coin too, thus making us the investors that follow after you?

Professorlocknload's picture

Gotta love a good Pyramid Scheme. Clean and simple.

Spungo's picture

Depression is the new N word. Anyone mentioning it will be fired.

Levadiakos's picture

Did the Pope released more doves?

Raging Debate's picture

There has been improvement and people are a bit more optomistic. I think the article is correct regarding remeaining catious, I see several more years of stagflation as the Boomers retire and continue to draw down on consumption while healthcare costs continue to rise as they do (supply and demand).

The US needs better trade and immigration policies at the national level and far more pro revenue policies at the state level. A return of Glass-Steagall (now in the works) will also be needed to bolster investor confidence. A shame the crooks got away with the heist but lets be frank here. They did.

Perhaps we'll be more weary the next few decades until the painful lessons learned are again forgotten as we as a species do not seem to learn from history.

2016 will likely be the next year I invest in stocks while I am currently invested in real estate. I am also adding a staffer to my small business. If I followed the advice that all is rosy that I am seeing on the MSM I would add four. I'll grow this way for the next couple years (at least).

CrashisOptimistic's picture

A viewpoint mired in the old normal.

The new normal didn't start with Lehman.  It started 4 months prior in June/July when oil hit $147/barrel from less than $20 just 8 yrs prior.

THAT is the engine of destruction and no burying of heads in a longing for normalcy is ever going to fix it.

Nothing will.  The game is over and there's never going to be another game.  Plan for descent.

Raging Debate's picture

Certainly a headwind worth mentioning CrashisOptomistic. But the descent already happened. The energy cost speaks to a prolonged LOG period (low organic growth) for the foreseable future. It will be dull compared to other decades. Stagflation feels like a light at the tunnel one year and bleak the next. In any event, investing will be dull for the next several years.

Tortuga's picture

IHMO, decent started when no one stepped up with a definition of "IS".

If not before that.

Colonel Walter E Kurtz's picture

I will agree with you somewhat.

Things are slightly better in my Midwestern town, but it has not been because we as a country/government have made the necessary structural changes to allow real prolonged improvement. We as individuals have been fueling this slow stagnant recovery by our masters giving us zero interest on any savings you might have had, along with stealth inflation to erode your current earnings (if you have any). If $7 more trillion in debt in just a few years is what is giving us this "enormous" upturn, then just wait until the bill comes due. And it is coming due very soon, and you had better prepare. Someone's got to pay all the debt (and public pensions) and believe you me, bail-ins are going to be tried this next round.      

Tortuga's picture

It's great to see a 2 year plan. Except, the Chinese are working on their 100 yr plan. Is this what is meant by dichotomy?

W74's picture

What you retards here on zerohedge fail to understand is that the economy IS recovering, especially for the 0.1% but that WILL now trickle down to the rest of us mere 5%'ers and below.

With B.O. at the helm, the ACA about to kick in boosting both livlihoods and economic fortunes for all, and if we ever see a mimimun wage increase it'll mean more money for all of us.  How anyone fails to understand these basic economic principles is beyond me.  Dumbasses.



Levadiakos's picture

but we need to raise the minimum wage for illegals also

Tortuga's picture

He did raise the minimum wage for illegals, today, unconstitutionally but conciously.

Executive order 2343 on construction projects for the Feds.

eclectic syncretist's picture

Trickle down economic policies started over 30 years ago, and since their inception, the inequalities have worsened rather than improved.  You want to see some economic action?  Give the money to the bottom 10% and they'll immediately spend it all on junk meant to confer status amongst their peers, instead of hiding it away in the hopes of one day using it to make themselves even more money.  That's reality

Tortuga's picture

Dang right. I've got my eye on a new ford raptor with 90 months financing and ........

LooseLee's picture

I'm waiting for 'TRICKLE-DOWN' Morality and Ethics. Your 'trickle-down' theory of economics is BULLSHIT!

Spastica Rex's picture

Actually, where I live, the trickle has worked down about two standard deviations. Of course where I live, the economy is based on government defence contracting and nuclear waste management schemes. Truthfully, it's also been great for doctors, lawyers, building contractors, luxury car dealerships, etc.

The government spice must flow!

Spastica Rex's picture

We don't need lots of people employed, we just need a small subset of our population employed and making BIG BUCKS!

Suck it, bottom 80 percenters!

What did Jesus say about The Poor? "They'll always be with us?" Well, at least until they die off. Hurry up, already, the Georgia Guidestones are starting to look silly.

Levadiakos's picture

I take it you won't be attending the State of the Coup address tonight.

Kaiser Sousa's picture
Former top executive at Deutsche Bank found hanged at his Kensington home
  • Body of William 'Bill' Broeksmit discovered at his house in London
  • He retired in February and was a former senior manager at the bank
  • 58-year-old was close to Deutsche Bank co-chief executive Anshu Jain

"A former Deutsche Bank executive has been found dead at a house in London, it emerged today. The body of William ‘Bill’ Broeksmit, 58, was discovered at his home in South Kensington on Sunday shortly after midday by police, who had been called to reports of a man found hanging at a house. Mr Broeksmit - who retired last February - was a former senior manager with close ties to co-chief executive Anshu Jain. Metropolitan Police officers said his death was declared as non-suspicious."

Tortuga's picture

I hope that he is starting a change in trend.

Cortez's picture

Never bet against Mr. Yellen and the Bearded Lady.

Catullus's picture

Balance sheet recession? Uh, this is the first year of obamacare where the masses finally get to pay $900/ month to purchase a health put option that pays you in sub-par publicly funded healthcare. Think of all the savings!

Plus they're spending so much time on the phone and waiting in line that they can't keep spending money, so they're going to build savings that way too.

The middle class growth engine is back, baby. 2000 on the S&P by mid may.

ebworthen's picture

We are in a Depression spackled over with EBT, S.S. Disability, kids living in basements, and buckets of propaganda.

JR's picture

If you are using government data and wondering why your economic models for predicting revenue are not working, especially in light of the Fed’s “unconventional policies”…read this: 

A Big Middle Finger to Changes in the U.S. GDP – Lance Jepsen | Guerilla Stock Trading: Live free or die trying (8/25/2013)

The changes in how U.S. economic reports are calculated over the last 4 years brings government propaganda to a level not seen in generations. The huge amount of fraud by way of “cooking the books” has undermined the credibility of the current Administration as well as the Bureau of Labor Statistics (BLS) and the Federal Reserve System.

First it was manipulating the CPI which is used to calculate inflation. Not only does the CPI not include the biggest inflationary items in the economy like healthcare and education, but they even substituted items from the 7,000 families survey done back in 2009. The idea is to substitute higher priced items with lower priced ones so that inflation is non-existent. Such substitutions include things like chicken for steak. (Source: Response to BLS Article on CPI Misconceptions)

Next came the unemployment manipulation where the loss of one full-time job and the creation of 2 part-time jobs to take its place was counted as +1 job. Then we had the usual manipulation where if someone gives up looking for work because they can’t find a job, that makes the unemployment rate go down.

Now we have the grand-daddy of them all: GDP manipulation. By making the economy larger and counting more things towards GDP than at any time in the history of the country, it serves two purposes. First and most obvious, if you count things like expenses towards GDP, you can claim that the economy is continuing to grow because of positive GDP. Second and what a lot of people have overlooked in the mainstream financial media, by making GDP larger, you make debt a smaller portion of that GDP so that the debt to GDP ratio goes down…

At no time in the history of this country has the GDP calculation been changed to this extent. The GDP calculation changes that happened this year are so dramatic, they change the very definition of what GDP is.

If you take the manipulation of the rate of inflation (CPI), unemployment rate, and GDP as isolated events, you lose sight of the forest for the trees. Looking at these changes as a whole, we see the shocking and horrifying truth. The CPI was manipulated to make inflation lower. The unemployment rate is manipulated to make the unemployment rate appear lower. The GDP was manipulated to make the economy seem like it has more growth and less debt relative to GDP. In other words, some numbers are manipulated up, others are manipulated down, with the larger goal of making the economy look bigger and stronger than it really is. This directly impacts the decisions that we make as traders. How many times have you been blindsided by a big move down in the market that you never saw coming because you believed these economic reports? This is why you should join me in giving the Obama Administration and its Bureau of Labor Statistics (BLS), and the Bureau of Economic Analysis (BEA), a big middle finger (BMF)…

Folks, if the economy was slowly improving, there would not be a need to manipulate these economic reports to the extent that we are seeing.

“[T]he quality of government reporting has deteriorated sharply in the last couple of decades. Reporting problems have included methodological changes to economic reporting that have pushed headline economic and inflation results out of the realm of real-world or common experience..” – John Williams, ShadowStats

americanspirit's picture

There's a Vegas term for anyone trumpeting an economic recovery - house shill. Nothing more.

Mediocritas's picture

Since the US economy is currently right at the limit set by effective demand then a downturn is already baked in. See:

The Fed Funds Rate is impotent here (stuck in a liquidity trap). See:

The Fed is doing everything wrong for the economy because it focuses on capital instead of labour, wrongly believing that "if you build it then they will come". In fact, it is effective demand (incorporating labour share) that drives productivity, not the other way around, so with corporations currently maximising profits at the expense of labour share of income (defensive mode / hoarding exacerbated by ZIRP), then we are set up for another deflationary bust. See charts:

Talk of recovery is nonsense unless leaders get serious about curbing the erosion of labour share of income that has been caused by globalisation providing access to China's underpaid worker class. This is more than just monetary policy, it's an admission that the dominant neocon philosophy, ushered in under Reagan and Thatcher, was just plain wrong.

tip e. canoe's picture

i like the analogy of the Dull Party on that true.

So every week, more and more people decide not to come back and wait outside for a space in the party. They are relieved and go do something else. They have found an alternative. Maybe they make an "informal" party amongst themselves.

Save_America1st's picture

Alex Jones had Bob Barr on last Thursday.  He was a Congressman for 8 years back in the Clinton era.  He was the one who brought up the charges of impeachment against Clinton and got enough co-signers to make it happen. 

Bob Barr is a legal bad ass, ex-CIA, and a statesman along the lines of Ron Paul.  Look him up.

Here's the kicker:  Bob Barr is running for Congress again this year in Georgia and it sounds like he's easily going to win it.  And when he does win, he will be one of the baddest mother fuckers in Congress, and he's going to go after obama immediately with the same charges of impeachment that he used against Clinton. 

Here's the interview on Alex all gotta listen to it:

Barr said he pulled out the impeachment paperwork he used against Clinton and dusted it off...then he updated what needed updating and crafted it for impeaching obama...he said it was easy given all the evidence against obama and his usurpation of the Constitution. 

And since he already served 8 years in Congress previously, he gets all his seniority back...that means he can't be marginalized as some rookie freshman Congressman.  He's a legal wizard and knows how to work Congress inside and out.

He's going to be obama's biggest nightmare and will quickly build a coalition against obama and the rest of the treasonous scum in Congress.  I think we're going to see a lot more of the rats scurrying off the sinking ship once Barr gets back to town.

Here's his website...send him a few bucks, cuz we need this guy in D.C. big time to fight the fight up close and personal against obama and the rest of his scummy little miscreant crew.

Pass the word around to everyone you email and let's help make sure Bob Barr gets back to D.C. so we can get this impeachment rolling!!!