Carson Reveals Secrets of New Business Cycle: Cutting Research
The U.S. business cycle has been transformed as asset prices become more influential and manufacturing less so.
So says Joseph G. Carson, director of global economic research at AllianceBernstein LP, in a Feb. 8 report. While stable patterns had allowed analysts to easily forecast the magnitude of recoveries and recessions, that may no longer be the case, he said.
For example, the tenet that the initial pace of recovery is dictated by the steepness of the recession that preceded it has been shattered by the post-crisis performance of the U.S. While its economy suffered a peak-to-trough decline of 4.7 percent, far worse than the historical average of 1.3 percent, the recovery has shown average quarterly growth of 2.1 percent, less than half the historical rate.
Among the changes that Carson says explain the root causes of U.S. recessions since 2000: financial imbalances and sharp declines in asset prices. Slumps in the past, by contrast, were triggered by accelerating inflation and tighter monetary policy. Finance-driven downturns are harder to reverse because they take longer to rectify than imbalances in inventories or products do.
Price patterns have also changed. During recent expansions, consumer and producer prices rose only half as fast as in earlier periods, while assets gained faster. The emphasis on assets rather than income and profits probably will stay, Carson wrote, because the Federal Reserve doesn’t take asset inflation into account when setting interest rates. That means fewer limits on how assets can influence business cycles.
Business-cycle dynamics are also affected by a decline in manufacturing’s share of gross domestic product growth, from 30 percent in the 1960s-1980s period to 13 percent in the 2000s. That contribution is set to recover to about 20 percent amid cheaper energy prices and capital expenses, estimated Carson.
“We think it would be wrong to conclude that the causes of the recent downturn were unique, since many of the contributing factors were building up over a span of many years,” said Carson, a former Commerce Department economist. “There is still plenty for economists to investigate and learn from about how cycles have changed.”
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Globalization has resulted in consistent consumption patterns across rich nations, yet that is not always reflected in stock prices, according to Deutsche Bank AG.
Using data from the Organization for Economic Cooperation and Development, Stuart Parkinson of Deutsche found that while spending growth varies, consumption priorities across nations have been “remarkably coherent.”
Recreation and culture, for example, is the fastest growing consumption category across the Group of Seven nations, while communications is the second, London-based strategist Parkinson said in a Feb. 7 report. The slowest category in each is alcohol and tobacco.
For Parkinson, the interesting factor is that the synchronous behavior has occurred even with Japan mired in a slump. That suggests to him that even if other economies face prolonged periods of weak growth, it won’t necessarily mean different consumption patterns.
The twist, Parkinson says: The uniform behavior hasn’t had a bearing on equity markets. In the U.S. and Europe, for example, telecommunications and information-technology shares have lagged broader market indexes despite the above-average consumption growth.
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Slowing rather than accelerating price pressures remain the greater risk to the U.S. economy, according to Bank of America Merrill Lynch.
In a Feb. 12 report, which advises investors to “fade the bond market selloff,” co-head of global economics research Ethan Harris said most measures show inflation falling below the Fed’s 2 percent target.
“This is not a fluke,” said New York-based Harris. “Almost all of the underlying determinants of inflation point to weakness.”
Among them: plenty of spare capacity, limited labor-cost growth and cheaper imports and rents.
If such trends continue, Harris said he will have the revisit his forecast for inflation to hold around the Fed’s goal for the next two years.
Even so, the Fed’s quantitative easing debate has been “hijacked” by those warning of a potential surge of inflation, forcing the Fed onto the defensive and leaving officials “mute on what they will do if inflation is too low,” Harris said.
An undershooting of their target would actually encourage central bankers to stick with their asset-purchase program for longer, he said.
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With the federal government poised this year to offer less support to the U.S. economy, state and local authorities are set to pick up some of the slack, according to Eric Green, global head of rates and FX research at TD Securities Inc. in New York.
Congress is on the hook to come up with a way to trim the nation’s budget deficit by March 1. Otherwise, $1.2 trillion in across-the-board spending cuts, known as sequestration, will begin, slashing an estimated $85 billion from the government component of GDP in 2013. When added to the effect of higher payroll taxes and a bigger levy on top income earners, Green calculates GDP will be 1.3 percent lower than it otherwise would have been.
That drag will be lessened by spending at the state and local level, where governments have greater capacity as a result of increased tax revenue and prior spending-reduction efforts. State and local outlays could add between $40 billion and $50 billion to the economy, staving off an additional 0.3 percent cut to GDP, according to Green.
Along with stronger demand from the private sector, Green projects the economy will grow at a 1.9 percent pace in 2013.
“Sequester or not, the fate of the recovery is not hanging in the balance,” he wrote in a Feb. 13 note to clients.
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The boom in commodity prices is prompting an increase in so-called resource nationalism as governments try to take advantage.
Countries with populist leaders, lower per-capita incomes and greater economic inequalities are most likely to try to derive additional benefit from their natural resources, according to a Feb. 8 report by Fitch Ratings analysts.
Recent examples include Argentina’s announcement in early 2012 that it would nationalize most of Repsol SA’s stake in the country’s biggest oil group, YPF SA. In Ecuador, the government revised the contracts of private oil companies. Mongolia’s government said in August it would like to increase its participation on the Oyu Tolgoi copper and gold mine.