Financial Times Deutschland, Germany

Hillary Clinton and Recession … Real or Imagined

 

“Is it coming? Or isn't it? The question of whether there is a U.S. recession moves markets as well as election battles. … For U.S. presidential candidate Hillary Clinton, it's enough to know that people somehow feel that there is a recession.”

 

By Thomas Fricke

                               

 

Translated By James Jacobson and Ulf Behncke

January 8, 2009

 

Germany - Financial Times Deutschland - Original Article (German)

Senator Clinton feels your pain: She appears electorally positioned for a recession.

Is it coming? Or isn't it? The question of whether there is a U.S. recession moves markets as well as election battles. It seems the answer is mainly one of definition: According to a popular rule-of-thumb, the economy must contract for at least two straight quarters to qualify for the title recession. For U.S. presidential candidate Hillary Clinton, it's enough to know that people somehow feel that there is a recession.

 

Sure, this is an election campaign. The more important question, however, may be what a recession means - and whether this heralds a major crisis rather than just feelings of discomfort. Over recent decades, there have been almost as many economic downturns as there have been election campaigns. It's probably all the same to us if Hillary senses a recession. But a long-term recession like the one Japan has experienced would be a global disaster. Here's an attempt at an explanation ...

 

POTENTIAL FOR A MINI-CONTRACTION

 

What is certain is that U.S. economic growth has slowed considerably. It wouldn’t take much for “mini-growth” to turn into a “mini-contraction.” It is however equally remarkable just how many recent economic indicators and corporate results have turned out to be anything but poor.

 

Despite a crash in their “economic outlook,” service providers remained unimpressed by recession panic in January and announced increased growth. While banks have reported billions in losses, MAN [one of Gemany’s most prominent engineering firms and manufacturers ] is reporting record earnings and U.S. companies have increase their purchases; all during a time of increased productivity, which is unusual for a recession. And at last count, the unemployment rate is no longer at five percent, but once again below it.

 

Apparently, banks are hesitant to extend credit, but 85 percent of companies surveyed say they are having no trouble obtaining money. So what’s going on?   [WORLDMEETS.US]

 

One explanation could be that the big slide is still to come. It could be, however, that there is something else behind the confusing indicators. Some suggest that the 2006 real estate crash and the 2007 financial crisis came at a time when the U.S. economy was anything but ripe for an economic downturn. Fortunately! When measured against growth in net value, companies have reduced their debt load since 2000 – to about the levels seen at the end of the 1980s – and profits since 2002 have almost tripled, which is a huge cushion.

 

At the same time, outside of real estate and the financial world, there was little indication of a slowdown in any classical sense. Unlike during the New-Economy-frenzy [the shift from manufacturing to services  in the 1990s], U.S. businesses have neither invested too much in equipment nor excessively in human resources. Just the opposite: capital expenditures rose at below average rates. There wasn’t a trace of over-investment. The same holds true for unemployment. The same holds true for unemployment. And up to now, there has been no spiral of prices or wages followed by a drastic increase in Central Bank interest rates, which has triggered past recessions.

 

This is apart from the fact that at a time of financial shock, U.S. exporters have already profited from the wonderful gift of a now-30 percent devaluation in the dollar, which means a spectacular improvement in price competitiveness.

 

Greenspan [La Stampa, Italy]

All this may explain why companies, despite the financial panic, are greatly increasing investment, even if this isn’t necessarily enough to prevent the U.S. economy from one or two quarters of contraction. Even the fittest boxer wavers when he absorbs too many blows – when in addition to shocks to finance and real estate has come an oil shock, too. This diagnosis could help us forecast what’s to follow. Recession guru Alan Greenspan lectures that a strong recession won’t come gradually, but abruptly, and will affect large sectors of the economy. So far, one identifies no such change.

 

CHECKS AGAINST SHOCKS

 

The assumption of every major crash scenario is that U.S. consumers will eventually reduce their consumption increase their savings - which is desirable in the medium term. Patrick Franke, a U.S. expert at Commerzbank , says the question is only whether this will come abruptly or not.

 

Previous experience seems to contradict this as well. During the last crash between 1999 and 2002 (keywords Stocks and the New Economy), American households lost a breathtaking one-fifth of their assets - without consumption plummeting at that time (it is often said that that this was helped by the drastic increase in property values, but this didn’t occur until much later). The same [strength of consumer consumption] occurred after the stock market crash of 1987.

 

This gives one hope that many consumers take such losses in their assets rather calmly (as over recent months), and that governmental tax rebates – given in 2001 and now planned again - can help prevent an interruption in consumption.

 

But Australians have shown that a swing toward more rational consumer behavior is possible even without a major crisis. Like the Americans, up to 2006 Australians were spending much more than their monthly paychecks allowed. Since then though, the Australian savings rate has reached three percent, which is an enormous turnaround. And that was without any demonstrable economic slowdown.

 

If tax checks, aid for the dollar, investment and consumer demand restore composure, chances aren’t too bad that the U.S. economy will soon begin to recover – whether or not there is one of those occasional mini-recessions. Instead, the problem could be the period afterwards when the underlying cyclical forces of growth become exhausted. Even if the enthusiasm of U.S. consumers diminishes gradually, this will result in a slowdown in economic growth.   

 

It could be that at least for a while, if Hillary Clinton is elected she will have to deal with (at least) the perception of a recession.

 

*Thomas Fricke is Chief Economics Editor at the Financial Times Deutschland

 

CLICK HERE FOR GERMAN VERSION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[WORLDMEETS.US Posted 1:00pm, February 10, 2008]