a recovery at risk households and companies

8/14/2019 A Recovery at Risk Households and Companies

1/13

01 18 2010

A recovery at risk

Households and companiesin the United States and in Europe:

spenders or savers?

Dean BAKER,Co-Director, Center for Economic and Policy Research,Washington


2/13

Coface Country Risk Conference 2010

Key Factors Limiting Growth in the U.S.

1. Saving rate is rising back to normal levels

2. Housing wealth is likely to decline further

3. Demographics are hugely tilted towards savings

4. High unemployment will deter consumption

5. Excess capacity will restrain investment

6. Over-valued currencies create uncertainty


3/13


U.S. Saving Rate has Risen Sharply, Still BelowTrend

0

2

4

6

8

10

12

14

1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2007 2008 2008 2009

Source: Bureau of Economic Analysis and author's calculations

Saving as a Percent of Disposable Income

In %

Saving Rate

Adjusted Saving Rate


4/13


The Housing Bubble Has Only Partially Adjusted

Real house prices are still 15-20 percent above long-term trend

Vacancy rates are at record levels

Continued high unemployment

Flood of foreclosures (2 million a year) Factors temporarily supporting house prices will be removed

Fed purchases of mortgage backed securities (March)

First-time homebuyers tax credit (April) Tighter standards at Federal Housing Authority

Tighter standards at Fannie and Freddie


5/13


Demographics Tilted Toward Savings

Baby boom cohort is in its peak saving years (ages 46-64)

Defined benefit pensions are disappearing

Most have little savings Median 45-54 - @$50,000

Median 55-64 - @ $60,000

Housing equity vanished with crash (Many underwater) Median 45-54 -@$30,000

Median 55-64 -@$70,000

Proposals to cut Social Security

Seniors face large and growing health care expenseseven with Medicare


6/13


Unemployment Will Remain High

10.2%

9.1%

7.3%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2010 2011 2012

Projected Unemployment Rate - Congressional Budget Office


7/13


Investment Will be Limited by Excess Capacity

Retail, office, and hotels all hugely overbuilt

in boom 2005-2008

Capacity utilization in manufacturing 67.6 percent (Oct.)

near post-depression low


8/13


Dollar Remains Substantially Over-valuedAgainst East Asian Currencies

U.S. deficit with China is continuing to rise

There is huge uncertainty over future exchange rates


9/13


A weak growth is expected in the US

U.S. economy likely to show weak growth

for the next several years

Possibility of further stimulus due to political pressure


10/13


The Prospects for Further Stimulus

Pro:

Slow growth and high unemployment are bad news

for the Democrats in 2010 congressional elections

and 2012 presidential election

Stimulus money can please key constituencies

Stimulus money can also be tied to long-term goals(e.g. global warming, health care)


11/13


The Prospects for Further Stimulus

Con:

Concerns over deficit/debt raise (unfounded) fears of declining

future living standards and financial crises

projected debt/GDP ratio for 2019 is just 67.8 percent low current interest rates suggest little fear in financial markets

real U.S. deficit story is health care

Stimulus will result in wasteful spending:

bad news in the era of YouTube


12/13


The View of Europe from the United States

Europe, especially France, is often held up as a model of failure

(eurosclerosis)

myth of high unemployment

lack of dynamism in the economy

increasingly irrelevant with the rise of China and India


13/13


The View of Europe from the United States

Less aggressive response to the economic crisis

and therefore slower recovery

smaller stimulus packages

ECB less aggressive than Fed

a recovery at risk households and companies

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