It's still the economy, stupid

Finbarr Bermingham speaks to Manoj Pradhan, Global Economist at Morgan Stanley, to get his views on the US economy, and a forecast for next year

If a week is a long time in politics, then a year in US economics feels like a lifetime. In 12 months, the economy has shown little sign of improvement, with unemployment high and growth low. Manoj Pradhan, Global Economist at Morgan Stanley, is concerned about America's current economic malaise, and draws parallels with the events of this time last year.


"There are shades of 2010 in what we're seeing now," he explains. "Again, the slowdown has come midyear. I look to the expansion in 18 industries as a metric for the breadth of growth and just before the downturn started in 2010, 17 of these were expanding, suggesting recovery. Within two to three months, this figure had dropped down to ten. This year, they have fallen off a cliff again, in an almost identical fashion."

America is looking for a path which will lead the nation to sustainable growth once fiscal and monetary policy stimuli are removed, but there's no sign of it yet. Manoj explains: "Before the crisis, the part of the economy that delivered very strong growth was the consumer sector. Now, though, the consumer is facing two headwinds. On one hand, unemployment is at 9 per cent and on the other, the consumer is still deleveraging." The result is that neither personal income nor consumption are being supported.

Ordinarily, corporates can be relied upon to steady the ship and even now, many of them are turning over large profits. But these profits aren't filtering down through the rest of the economy, though, partly due to a lack of incentives to grow their businesses and recruit. Manoj says: "Capacity utilisation is not where we need it to be. When you have an office, you don't move out of it and into a bigger one until you're using it to its maximum capacity. The United States is suffering from a similar problem. Companies have got more than enough capacity to produce what they need today, which is less than what they were producing in 2008. They have no reason to build more factories or hire more people right now, so they need an incentive to invest in more capacity."

Deal, or no deal?

The stagnation has been compounded by the political grandstanding over the raising of America's national debt ceiling - after weeks of wrangling, Democrats and Republicans eventually came to a last-minute agreement to raise the amount of debt the US is allowed to incur, thereby just avoiding a national default. Manoj admits that "it should never have been a big deal", and outlines just how harmful the debacle has been. "It damaged the economy in two ways. First of all, because it went on for so long and was so public, it had a significant negative impact on market, household and corporate confidence. Secondly, in the absence of this debate, President Obama's stimulus package would have faced less resistance because it would have made fewer headlines against the backdrop of a debt ceiling. Now, because of such a long battle on both sides, it will be very difficult to implement the package. That's a real problem because right now we need fiscal stimulus to keep the economy going for about six months to a year."

In the aftermath of the debt ceiling saga, rating agency Standard & Poor's lowered the United States' credit rating from AAA to AA+ for the first time. The downgrade fuelled speculation that the US would lose its position as the world's dominant economy, with the dollar being replaced by the Chinese renminbi as the world's reserve currency of choice. Manoj thinks such a development is unlikely, and that the two financial superpowers shouldn't always be viewed as opponents. "In economic terms," he explains, "they tend to be partners in global recovery more than anything else. If there were no China to rescue global growth, the conditions in the United States would have been significantly worse. China generated a massive amount of stimulus, which was worth a fifth of US GDP. That was something the US couldn't have done. There are obvious political and economic differences between the US and China, but it's quite clear that if one of them doesn't work, we can still get by, but if both of them don't work, we're in serious trouble."

I need a dollar

On whether the dollar has entered the final phase of its primacy, Manoj is sceptical: "I don't believe there will be a very serious challenge to it," he says. "A lot of emerging economies are looking relatively sound compared to the US, but the US is still the dominant player. It has the deepest financial market, the best ways to hedge your risk, the biggest asset market and is best able to handle complex flows of capital relatively easily. If the dollar gets through this crisis, it will be another huge stamp of approval on its already unique resilience."

But there's no questioning the fact that the economic problems the US faces are severe. Recovery from the 2008 financial crisis has been "BBB - bumpy, below-par and brittle" and Manoj thinks things are likely to get worse before they get better. He asserts that the US and Europe are both moving "dangerously close" to another recession and that very weak levels of growth are likely to define the remainder of this year and the first half of next.

Manoj is confident, though, that the economy will eventually start yielding positive developments. "The US economy needs more time," he says. "I would say that it's around two thirds of the way through the recovery process, but monetary or fiscal policy is required to provide the time required. If you offer incentives in the form of cheaper borrowing, or if you give money to people directly through fiscal measures, they can go out and spend it. That translates into more demand for goods, which results in companies building new factories and once that kicks in, I think we're six months to a year from being home and dry. If President Obama's proposed package of spending comes to fruition, I believe we'll have a pretty decent tailwind. However, if we don't have a decisive response from the policymakers, we're in for more trouble."

With the presidential election looming on the horizon, bringing with it the prospect of further partisan bickering, the likelihood of approval of the fiscal stimulus required is dwindling. The American economy may not be down and out yet, but without real political cooperation, the clock is ticking.