|
PureBytes Links
Trading Reference Links
|
On the Edge
The just-released US GDP report for the fourth quarter of 2002
is an important warning sign. It paints a picture
of a US economy that has slowed to its "stall speed"
before it was hit with the full force of any impacts
associated with looming war in Iraq. To the extent that a <FONT
size=2>further shock is in the offing, I fear it will be exceedingly
difficult for the United States to avoid a recessionary
relapse. The risk is it may already be too
late.
My argument rests on a time-honored "recession model" that is
really applicable to any economy. It has two
components - the so-called pre-recession stall and an
exogenous shock. There is no precise metric as to
what constitutes an economy's stall speed. I define it <FONT
size=2>essentially as a sluggish growth grate that leaves the real
economy lacking in the cyclical immunities that are
required to cushion it against unexpected blows.
In the case of the US economy, I would place the current
GDP stall speed in the 1% to 2% range. If the rate of <FONT
size=2>growth slows into this range, then it doesn't take much of a shock
to produce a recession.
That's exactly the way it worked in 1990. By the second
quarter of that year, annualized real GDP growth had
slowed to 0.9% on a sequential quarterly basis (or 1.6%
on a year-over-year basis). This downshift was in
response to a late-cycle Fed tightening aimed at staving off a <FONT
size=2>classic cyclical build-up of inflation. As the economy slowed
in response, the Fed was given great credit for
achieving the heretofore impossible - the ever-elusive
soft landing. For a few fleeting moments it
actually appeared as if that glorious scenario was actually coming to
pass. The outcome of subpar growth was just what was
needed to lower the inflation rate, which had risen at
the time to 5.5% ( as measured on a CPI-basis).
Alas, the landing quickly went from soft to hard. Saddam <FONT
size=2>Hussein marched into Kuwait in early August 1990 and oil prices
shot up. They briefly pierced the $37.50 threshold
for four weeks in late September and early October
before receding sharply thereafter. But by then
the damage had been done - a stalling economy had been hit by a <FONT
size=2>shock. And the recession of 1990-91 was under way.
Such an outcome seems all the more relevant today. Real
GDP growth was just reported to have slowed to a 0.7%
annualized clip in 4Q02, little different from the stall
speed like outcome recorded in the pre-Gulf War quarter
of 1990. While the year-over-year growth rate of 2.7% in 4Q02
is a full percentage point faster than that prevailing in the
just prior to the recession of 1990-91, there can be no
mistaking the decided loss of momentum in the US
economy. In the final three quarters of last year,
annualized real GDP growth averaged just 2% - anemic by standards
of past cyclical recoveries. Moreover, that's actually a
good deal further below the current potential growth
rate (3% to 3.5%) than was the case in the summer
of 1990, when the 1.6% growth outcome was only slightly
below potential growth norms that were then closer to 2%. In
other words, it is hardly a stretch to describe the current
state of the US economy as being in the stall-speed
vicinity.
Based on the simple recession model outline above, that means
a significant shock could well threaten the
sustainability of this nascent economic recovery.
Such a conclusion should hardly be taken lightly in the
context of the mini-oil shock that is now in the process of <FONT
size=2>unfolding. Over the past year, crude oil prices as measured on a
West Texas Intermediate basis are up over 65% (from $20/
bbl at the start of 2002 to $33.85 today).
Ironically, this increase is comparable to that which
also occurred in the 1990 run-up to the Gulf War. Oil prices
started that year at about $22.50/bbl before surging briefly
over $37.50 in the immediate aftermath of the invasion
of Kuwait. In other words, on a percentage change
basis, today's oil price run-up is already comparable to
that which occurred in 1990. Needless to say, to the <FONT
size=2>extent that oil prices now move any higher as the Iraq problem
escalates, the case for a shock becomes all the more
compelling. For a US economy now hovering at its
stall speed, that's hardly a comforting <FONT
size=2>conclusion.
History often has strange ways of repeating itself - as does
the so-called political-economic cycle. It's hard
not to be struck by the irony of these two situations -
the Gulf War of twelve years ago and the looming battle
in Iraq in early 2003. In both cases, a George Bush was <FONT
size=2>sitting in America's White House, each one riding the crest of a
great wave of popularity. But in both cases, a
stalling US economy was hit by a brief oil shock.
In 1991, that combination was sufficient to produce a
mild recession that ended up costing "Father Bush" the presidency.
While the jury is still out on the economic ramifications of
the current oil shock, there can be no mistaking the
risks. Indeed, in many respects, today's
post-bubble US economy is in far worse shape than the <FONT
size=2>economy was back in 1990. That's certainly the verdict on the basis
of America's serious imbalances-a record current-account
deficit, a record low net national saving rate, and
record levels of private sector indebtedness. To
the extent that these lingering structural excesses <FONT
size=2>continue to spawn powerful economic headwinds, the combination of
the stall and the shock looks all the more troubling in
early 2003. In my view, the risks of a
recessionary relapse are high and rising. America <FONT
size=2>is back on the edge.
Stephen Roach (New York)
-- This is not an offer (or solicitation
of an offer) to buy/sell the securities/instruments
mentioned. Morgan Stanley may deal as principal in
or own or act as market maker for securities/instruments mentioned or
may advise the issuers. This may refer to a research
analyst/research report. For additional
information, research reports and important disclosures,
contact me or see <A
href="">https://secure.ms.com. We do not
represent this is accurate or complete and we may not update
this. Past performance is not indicative of future
returns. This communication is solely for the
addressee(s) and may contain confidential information. <FONT
size=2>We do not waive confidentiality by mistransmission. Contact me if
you do not wish to receive these communications.
In the UK, this communication is directed in the UK to
those persons who are market counterparties or
intermediate customers (as defined in the UK Financial <FONT
size=2>Services Authority's rules).
Yahoo! Groups Sponsor
ADVERTISEMENT
To unsubscribe from this group, send an email to:
realtraders-unsubscribe@xxxxxxxxxxxxxxx
Your use of Yahoo! Groups is subject to the Yahoo! Terms of Service.
|