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    Aug 08, 2003
    Global: The Half-Empty Glass
    Stephen Roach (New York)

    America’s long-awaited economic recovery is taken as a given these days. At least, that’s what the stock and bond markets are telling us (again). And depending on where you look, validation can even be found in the ever-fickle data flow. While I have conceded that there may be a vigorous quarter or two in the second half of 2003, I remain skeptical of the staying power of any such upturn. To me, the glass still looks half empty, at best.

    Take the widely heralded GDP growth surprise recently released for the second quarter. Yes, the 2.4% increase was a good deal stronger than expected. But it wasn’t a strong number in the absolute sense at all. The fact that second quarter growth exceeded expectations was only because most economists -- like their Wall Street analyst counterparts -- have now lowered the bar in this post-bubble era. Yet there can be no mistaking the persistence of decidedly subpar growth. Over the first seven quarters of this so-called economic recovery, annualized gains in real GDP growth have averaged a mere 2.6%. By contrast, over the first seven quarters of the past six cyclical upturns, real GDP growth averaged 5.4% -- slightly more than double the current pace. The current recovery even falls short of the previous record slowpoke -- the 3.1% pace recorded in the first seven quarters following the 1990-91 recession.

    Moreover, there was more than the usual amount of statistical noise in the latest GDP report. A 44% annualized surge in defense outlays accounted for fully 70% of the total increase in national output. Barring the outbreak of another war, that source of growth is probably tapped out. In addition, a 54% annualized surge in computers and peripheral equipment accounted for virtually all the growth in business capital spending and actually another 65% of the total increase in real GDP growth in 2Q03. Yet it turns out that fully 83% of that gain is traceable to a collapse in IT pricing, according to Commerce Department assumptions. Indeed, in current dollars, last quarter’s growth in computers and peripheral equipment accounted for only 7.1% of the total gain in nominal GDP. At the same time, personal consumption expenditures did increase at a 3.3% annual rate in 2Q03, well above the anemic 1.9% average annualized growth pace in the preceding two quarters. However, the bulk of those gains occurred for purchases of durable goods, whose share of real GDP has now risen to a record 11% -- so strong that it provides little scope for further improvement. In other words, much of last quarter’s growth surge appears traceable to nonrecurring factors rather than to the cumulative forces of cyclical revival.

    But there’s more to the tale than statistics. This recovery is still missing one of the most significant cyclical ingredients of all -- job creation. Fully 20 months into this recovery, the great American job machine has yet to shift gears. Since the economy bottomed in November 2001 (as per the recent cyclical dating of the National Bureau of Economic Research), private nonfarm payrolls have contracted by 1.2 million workers. By contrast, in the first 20 months of the past six business cycle upturns, the private-sector job count increased, on average, by 2.8 million workers. That means the current hiring trajectory has fallen fully 4 million workers short of the cyclical norm -- taking the concept of “jobless recovery” that was first coined in the early 1990s to an entirely different level. This has resulted in an equally worrisome shortfall of wage income generation -- the main driver of personal income growth; over the first 19 months of the current cyclical recovery, real private-sector wage and salary disbursements have recorded a cumulative increase of just 0.3%, far short of the 6.8% average gains that have occurred by similar junctures in the past six business cycle upturns. Putting it another way, real private-sector wage generation in today’s anemic recovery is currently running $241 billion short of the profile that would have been evident had the US economy held to its standard cyclical trajectory. Little wonder that Washington’s tax cutting hasn’t made much of a difference for the beleaguered wage earner.

    It has become conventional wisdom to blame this jobless recovery on America’s stunning productivity performance. I think that vastly oversimplifies a very complex issue. First of all, there is no empirical evidence of a consistent trade-off between productivity growth and job creation in the US economy. There are several examples of high-productivity recoveries that have been accompanied by rapid employment growth. That was the case in the 1960s, when both productivity and employment rose at about a 3% average annual rate over the 1962-68 interval. It was also the case in the latter half of the 1990s, when trend productivity of 2.3% was accompanied by 2.6% average annual employment growth. Yet there are also several examples of low-productivity recoveries that were accompanied by rapid growth in hiring; the low-productivity rebounds of the late 1970s and the 1980s both come to mind, when trend productivity growth was closer to 1% but job growth was maintained in the 3-4% range. The current experience of unrelenting headcount reductions in the face of persistently rapid productivity growth is a real outlier in the annals of the post-World War II US economy.

    That may well reflect a dark side to America’s productivity bonanza, one that I have worried about for a long time (see my November 1996 article in the Harvard Business Review, “The Hollow Ring of the Productivity Revival”). It all boils down to the essence of productivity enhancement -- whether efficiency gains are driven by synergies between human capital and technological innovation or by hard-nosed cost-cutting. The former is “good productivity” -- the stuff of rising prosperity and lasting improvements in a nation’s standard of living. The latter is “bad productivity” -- centered on strategies of downsizing that have the clear potential to lead to increasingly hollow enterprises and labor markets.

    I must confess to being worried once again that the pendulum is swinging from good to bad productivity in the United States. Facing stiff competition and lacking in pricing leverage, the imperatives of cost cutting have never seemed more acute. Courtesy of newfound IT-induced efficiencies and increasingly aggressive outsourcing strategies, Corporate America has been highly successful in getting more out of less. As a result, rapid productivity growth has now become a double-edged sword. The good news is that it sets the stage for improved profitability and persistent low inflation. The bad news is that it is an inhibitor of job creation, thereby denying the US economy the self-generating fuel of wage income growth that normally puts cyclical recoveries on a more sustainable path.

    Nor are there any signs that US businesses are about to entertain a serious rethinking of hiring policies. That’s certainly the verdict of the Manpower survey of employment intentions, where the tally for 3Q03 showed nationwide hiring expectations falling to their lowest level in 12 years. The same can be said for the latest Challenger survey of publicly announced layoffs -- a 43% sequential surge to 85,000 affected workers in July. Lacking in job creation and the income generation typically forthcoming from improved labor market conditions, the saving-short, overly indebted American consumer is looking more and more vulnerable.

    Unfortunately, none of this is shocking for a post-bubble US economy. Having failed to purge the excesses of the late 1990s, America continues to face powerful post-bubble headwinds. At least, that’s the verdict I take from the confluence of record levels of private sector indebtedness, an all-time low in the net national saving rate, and a record current-account deficit. Nor is there much hope for improvement on any of those counts -- especially with a runaway government budget likely to compound the national saving and current-account conundrum for some time to come.

    All this speaks of a low-quality recovery in the United States -- hardly the stuff of a spontaneous healing of business sentiment that would spark a resurgence in job creation and capital spending. While I certainly don’t rule out a temporary quickening in the pace of economic activity in the second half of 2003, I worry that any such improvement will be short-lived. In my view, there is still a distinct possibility that a post-bubble, deflation-prone, and hiring-short US economy could run out of gas again later this year or in early 2004. It’s hard to expect much more from a half-empty glass.
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