|
August 18, 2010)
On the face of it, prospects for the American economy are being the object of a conundrum of sorts (with associated impacts on all the other major economies in consequence). As commonly agreed upon, the stock market is considered a key advanced indicator for the economy overall, the time lag being of the order of six months. Now, the Dow was almost up 9% in the first half of 2010 over last year's H2. On this basis therefore, growth prospects for the current half should be reckoned as positive. Yet, long rates, which are considered as a proxy for aggregate expectations regarding growth and inflation, tell a very different story. For the average for US 10 year bond yield in H1 2010 was only 3.6%, with the trend for the rate pointing down sharply, translating in expectations of low growth or low inflation (if not near-deflation), or both. So, what is what?
The thing is that the whole is not necessarily inconsistent. Q2 growth was 2.4%, admittedly markedly down from 3.7% in Q1 and from the exceptionally high 5% of Q4 2009 (when growth was clearly turbo-charged by pent-up demand), but still yielding 3.7% for this year's H1 as a whole, up from 2.4% in H2 2009. Which, all in all, is indeed not too bad: for perspective our growth forecast for the current half is 2.7%. But the bond market isn't looking at growth. What it's looking at is unemployment, and in that respect - with a rate hovering around 10% and the further aggravating circumstance that many of those lucky enough to have a job are in actual fact to a very significant degree under-employed - the situation is without doubt alarming. Now then, how can such an employment predicament coexist with growth rates as those indicated above? It can, because in the case at hand said growth is (if only in a somewhat perverse way) the consequence of the labor market's plight: people with a job, out of fear of losing it, strive for high productivity levels, which in turn are directly conducive to growth. With the further qualification that, again because of current labor market conditions, pay increases are subject to a heavy lid and thus, growth is mainly converted into profits - something which, by the way, is a major factor behind the good performance of the stock market referred to at the outset.
That said, this set-up is hardly sustainable, as, among other things, it exacerbates the ongoing polarization between incomes in the top brackets and those in the middle and lower ranges. In this context, it is perhaps appropriate to recall once more how things developed in the wake of the 1929 crash. Then, the stock market first staged a sharp revival (the movement was actually stronger than what we have seen last year and in recent months), which however proved only temporary. As to the economy overall, it didn't sink for good into the Great Depression until 1932. From this vantage, hence, back to the present, a double dip if not worse down the road is anything but the figment of imagination of a chronically pessimistic type.
* * *
What about the Chinese-style 8.8% annualized Q2 growth rate sported by Germany? One thing is certain: the German economy and the rest of the European Union are on entirely different planets, confirming the virtual impossibility for Euroland to conduct a coherent common monetary policy - and for that matter, a policy tout court. Is another crisis of the euro around the corner? Not unlikely.
_____
Related graphs :
Forecasts of Main Economic Indicators
|
Top