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SPEAKING
FREELY
Bye-bye macro
economy
Speaking
Freely is an Asia Times Online feature that allows
guest writers to have their say. Please click here
if you are interested in
contributing.
Despite the
uneven character of the expansion over the past
year, the US economy has done well, on net, by
most measures. - Federal Reserve Chairman Alan
Greenspan
The above assessment suffers
from one problem: it is not really true. The
remarks are important as a stark reminder of a
powerful sea change in thinking and talking about
the economy. For many on Wall Street and at the
Fed, the macro economy has been reduced to Fortune
500 profitability and asset market performance.
The IMF has lowered its forecast for global growth
and called attention to risks from US imbalances.
The National Association of Business Economists
(NABE) just reduced its US growth forecast by 0.2%
to 3.4%. More sanguine forecasts are increasingly
driven by a differently defined macro economy. We
are no longer all on the same page regarding the
object of analysis. The relentless search for the
positive while ignoring asset bubbles and income
redistribution has required shifting focus. It has
also required equating the health of the macro
economy with equity and bond market performance,
corporate profits and the housing market. Maybe
this is what they really meant by "the new
economy".
Broadly the US economy is
composed of the actions and decisions of
consumers, firms, governments and international
trade and financial flows. Enterprises,
particularly the largest 500-1000, have been
performing well. There are some glaring exceptions
like autos, auto-parts and airlines, though. Heavy
financialization (rise in the importance of
speculative activity and money lending to the
extent that many are moving out of their core
businesses and going into intermediation and
credit services) in a wide range of firms - taking
advantage of cheap money and debt-hungry consumers
- has reached a fever pitch as a profit driver.
Thus, profits remain strong
notwithstanding serious risk of profit
deceleration from a flattening yield curve,
over-exposure to highly leveraged consumers and
strengthening dollars. One might pause to note
that leading American firms have worked
ceaselessly over the last 30 years to diversify
away from excessive reliance on what used to be
called the US economy. Bureau of Economic Analysis
(BEA) estimates suggest that more than a quarter
of American corporate profits were earned outside
the US in 2004. There is consensus that this
number will continue robust growth in the years
ahead. This might suggest the dangers of
conflating profits with domestic economic
health.
The news on the other three
fronts, representing over three-quarters of the
American economy, is terrible! Our general public,
larger by over 10 million since 2001, is just
recovering the jobs lost across a short and steep
recession followed by a protracted and painful
"recovery". In May, we finally recovered the March
2001 employment numbers. The stunning growth in
employment that has so many crowing is net 0.03%
private sector employment growth over 50 months.
Since World War II, it has taken an average of 23
months to regain pre-recession employment levels.
This time it took 50.
Real median wage and
salary growth have under-performed badly.
Miraculously, consumer spending has risen by
several percentage points as a gross domestic
product (GDP) component while wages and salaries
have fallen as a national income component.
Consumer debt, particularly in the housing area,
has grown at super-exponential rates. 2004 marked
the all-time high-water mark for corporate profits
as a percentage of national income and a 40-year
low for wage compensation as a national income
share. Before the "new economy", when macro
economics referred to more than assets, bubbles
and profits, this was called redistribution and
viewed with some nervousness. Fortunately our
leading lights are busy taking the dismal - and
perhaps the science - out of the dismal science.
The federal budget, despite the recently
ballyhooed excitement about a mere $350 billion
projected shortfall, is dismally in the red.
Long-term commitments like prescription drug
coverage, $354 billion in underfunded insured
pensions and changing population demographics beg
for skepticism regarding these projections. In
addition, the supplemental spending games and
likely high future costs of foreign and domestic
security operations mock rosy forecasts. Rapid
growth in non-discretionary spending and proposed
tax cut extensions render ebullience absurd. So
goes another pillar of that strong macro economy.
Perhaps, the Fed and many on The Street
prefer to focus on Fortune 500 profits and asset
markets because they are macro economic high
points. However, equating them to the macro
economy requires jettisoning the presumptions that
economic models are based on. Dropping more than
half of the measure formerly known as "the
economy" seems to do wonders for bullishness - in
many senses of the word.
A glance at the
international position of the US does nothing to
allay fears. We are not even interested in
rebalancing. But these days, trade is not part of
the macro economy anyway. None of the folks in
Congress screaming about the yuan or tariffs have
plans to adjust the structural drivers of 6%+ of
GDP trade imbalances or our $2-3 billion per day
net foreign capital inflow habit. There is far
more interest in blaming others and spinning
comforting yarns about the magic bullet of 5-8%
yuan revaluation. As mass buying of our super
low-yield Treasuries shifts to hedge funds instead
of East Asian Central Banks, expect greater
volatility. Funds often employ heavy leverage to
juice yields and must be sensitive to potentially
serious capital losses. Said plainly, they will
not, cannot and should not be expected to grin and
bear it if downward price pressures emerge.
The dollar's recent strengthening has been
celebrated as a sign of recovery, just as its long
trend weakening was celebrated for increased
export competitiveness. Few seem to notice that
our trade imbalances shot up as the dollar fell
and are unlikely to be magically repaired by its
rise. International growth estimates are calling
for a return to US-led developed world growth,
suggesting worsening US trade shortfalls. If all
that net importing forces others to recycle
unwanted bucks back into asset purchases and
loans, great. This will again boost short-run
profits and asset market prices. In broad economic
terms, this is dangerous. In the new macro, this
is growth. Ah, the power of changing your
definition of macro. Just be careful not to ask,
"which macro economy"?
Max Fraad
Wolff is a doctoral candidate in economics at
the University of Massachusetts, Amherst. This article has been republished
with permission from PrudentBear.com
(Copyright 2005 Max Fraad Wolff)
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click here
if you are interested in
contributing. |
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