What Might Go Right in the Economy
The preoccupation with all of the things that could possibly go wrong has been a persistent characteristic of this economic recovery. It was termed recession porn in 2009. It has been a focus of websites, pundits and, of course, goldbugs. When an economist picks up the nickname “Dr. Doom,” it suggests an obsession with the negative.
Recession porn was perhaps best parodied in the following tweet:
It was a wry reference to the Armageddon cheerleading that would make gold, canned goods and any small-weapons caches much more valuable.
Simon Cox, Asia Pacific investment strategist at BNY Mellon Investment Management, looks at the global economy and asks a very different question: What if everything started to go right in the world economy?
The thought exercise assumed that the U.S., Japan, China and India all saw growth accelerate at the same time. “If these four economies were to fire on all cylinders at the same time, it would lift growth and trade in the rest of the world, reverse the slide in commodity prices and underpin a further rally in global share prices,” Cox wrote. That adds up to about $18 trillion in economic gains by 2020. Note that it comes with faster food inflation and oil at $100.
But you don’t need to assume anything unusual to plot out a scenario in which the U.S. economy accelerates. There are already lots of signs that a few things have begun to go right and, if they continue, we could see a virtuous cycle that builds on itself and kicks the U.S. recovery into higher gear.
We constantly ask ourselves: “Where are we in the economic cycle?” Today, let’s pose another question: “What might go right?”
Here's a place to start: the continuing post-credit-crisis recovery. As we have pointed out before, the U.S. isn't experiencing the usual recovery after a recession. Rather, it is more typical of what happens after a financial crisis. That frame of reference creates a very different environment for job creation, wage gains and retail spending -- all of the factors that go into gross domestic product.
As detailed in Carmen Reinhart and Ken Rogoff’s 2011 book, "This Time Is Different: Eight Centuries of Financial Folly," a recovery after a credit crisis takes appreciably longer than the usual recession recovery. After a crisis like the one in 2007-09, Reinhart and Rogoff tell us to expect, on average, a recovery to take about a decade. And now, here we are in 2015, the first year when we are closer to the end of that decade than the beginning.
Despite slow growth and volatile employment figures, signs of improvement abound. When companies such as Wal-Mart and Target raise their minimum wages, they aren't doing it because they are nice guys. They need employees to keep the shelves stocked. As we noted in February, Wal-Mart has a host of issues created by its low pay and lousy working conditions, including a staff that can’t wait to quit at the first opportunity.
Describing the employment market as a tug of war between capital and labor misses the basic economic point. It is really a battle of supply and demand. You can get away with paying minimum wages with no benefits and treating your employees shabbily if there are few alternatives. Being forced to increase wages for unskilled labor is a sign of increased demand.
Back to the virtuous cycle. What does it look like? When a company such as Wal-Mart loses a few employees, they can be written off as malcontents. Then a few more leave, going to companies with more generous pay or benefits. Not long after that, managers who have been reluctant to hire or invest in the business notice what some of their competitors are doing. Someone in accounting crunches a few numbers, and warns that the company is actually losing business because of understaffing or poor customer service.
Someone decides that retention of both staff and customers is important. Raises begin, hiring increases. Even investment spending ticks up.
What do employees do once they start getting paid more? They pay off some debt, save some and spend the rest. That leads to greater demand for goods and services, which leads to more hiring and spending.
It is the opposite of Keynes’ paradox of thrift: When many economic players spend more money during an economic expansion, aggregate demand increases, consumption rises and economic growth accelerates.
This is more than a mere thought experiment; we are seeing some signs that this is occurring. Quit rates -- when someone voluntarily leaves a job, often to take another position -- are rising. Wages are ticking up. And more jobs are going unfilled and listings are increasing.
We don’t know what the economy is going to look like during the next 12 to 24 months. However, it is probable that many investors have underestimated the possibility of a virtuous cycle.
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