| A Bullish
Mirage |
| The Widely
Heralded Sharp Upturn In Business Fixed Investment - And The Advent Of
Self-Sustaining Economic Growth In The U.S. - Is Merely So Much Statistical
Smoke And Mirrors, Reports The Good Doctor Below... |
| By Kurt Richebächer |
| Good news
about the U.S. economy is proliferating. The international media is littered
with articles stating that the U.S. economy is forging ahead with rapidly
rising profits. Yet neither the stock markets nor the currency market have
taken any notice. Asking traders, nobody could offer a plausible reason.
Yet there are two very simple tentative explanations: first, the economic
news is good, but not good enough to meet the high-riding expectations;
and second, the bulls are fully invested, and short- covering by the bears
is finished. |
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Better-than-expected
economic news, actually, is coming from all parts of the world. Asia, accounting
for 24% of global GDP, is hitting 7.7% growth this year. Ex Japan, the
economies are firing on all cylinders, with growth rates vastly outpacing
current and expected U.S. GDP growth.
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The tiger in the
group is China, with expected 11.5% growth this year.
Common to all
these countries are high levels of gross national saving, including depreciations
(averaging almost 30% of GDP), and also high levels of gross investment
(averaging between 22-23% of GDP). |
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| The U.S. economy,
accounting for a quarter of the world's GDP, is likely to finish 2003 with
GDP growth of 2.9%. Gross national saving is hitting a low of 13.5%, while
gross investments in the past few years have been hovering around 18% of
GDP.
The euro area,
accounting for 18% of global GDP, will exit the current year with barely
0.5% GDP growth. Both gross domestic savings and gross domestic investment
equal on average between 20-21% of GDP.
While U.S.
economic growth is increasingly lagging Asian growth, the global focus
remains primarily on the U.S. economy as the world's supposed predestined
locomotive, for the apparent reason that America's consumer is the world's
greatest spender. Implicitly, the U.S. current-account deficit of about
$560 billion per year reflects what Americans spend in excess of their
current production and income. |
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| Yet the
Asian countries,
ex Japan, have a second reason to run a surplus with the United States.
It is the main source of the high-powered money of their banking systems.
As their central banks are buying gargantuan amounts of surplus dollars,
they create liquid reserves for their banks that foster the lending boom
to their domestic producers.
Vastly excessive
reserve growth is creating vastly excessive money and credit growth, stimulating
and financing an unprecedented investment boom, similar to that in Japan
in the late 1980s.
Global activity
data has kept surprising on the upside for months, and there has even
developed speculation that unexpectedly strong global economic growth may
fuel considerably higher inflation rates. Commodity prices, in the past
generally an early indicator in this respect, have soared spectacularly.
Given, moreover, years of extremely rampant money and credit growth around
the world, accelerating inflation will be the next great surprise for many
people.
All this raises
many questions. |
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| It seems quite
feasible that the Asian tigers, with their record-high savings and investment
ratios, will continue to power ahead with runaway credit creation. Yet
our fear rather is that some of them, in particular China, may derail into
Japan-style bubble economies.
For us the
greatest uncertainties are about the U.S. economy, its financial system
and its currency. The great issue not only for America but also for the
global economy is whether the U.S. economy has definitely reached the stage
where economic growth has become self-sustaining. Or whether it may relapse
into sluggish growth next year, if not recession. Looking at the markets,
we have the impression that many people are struggling with this question.
On the surface,
the report of real U.S. growth of 7.2% in the third quarter, later revised
to 8.2%, was most impressive. |
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| Many commentators
hailed it as the highest growth rate since 1984.
To us, the
exciting growth number raised more questions than it answered. Yes,
it was the U.S. economy's fastest sprint in 19 years. At the time, it was
actually 7.3%, but this rate referred to GDP growth over the whole year.
This time, it was an annualized quarterly growth rate of 2%, which is not
always meaningful.
Considering
that the U.S. economy's long-term growth potential is around 3%, it should
be clear that after three years, during which annual real GDP growth has
averaged 1.8%, it will still take a lot more demand and growth acceleration
to remove the output gap that has accumulated in these years. It is also
generally agreed that a sustained and sufficiently strong recovery of the
economy is only possible with a prompt, brisk rebound of business fixed
investment. The bullish consensus is satisfied that this is happening.
As reported,
nonresidential business investment rose in the third quarter of 2003 by
11%, after 7.3% in the second quarter. For sure, these are impressive
numbers, but the only thing that gives them this strength is the fact that
the actual quarterly numbers have been annualized. The true non-annualized
growth rates of 2.75% and 1.8% for the two quarters would have caused nothing
but yawns.
But there is
a second big snag in the reported investment numbers. As usual, it arises
from the familiar statistical spin concerning the measurement of business
investment in computers.
In real terms,
or "chained" dollars, it increased over the full year until the
third quarter of 2003 from $297.6 billion to $390.3 billion, that is, by
$92.7 billion, of which $35.4 billion occurred in the third quarter. That
is the statistical fiction; actual business spending in current dollars
on computers increased over the same time by just $11.5 billion, from $76.8
billion to $88.3 billion, of which $5.9 billion was in the third quarter.
In reality, measured in current dollars, nonresidential investment over
the year increased overall by $46.2 billion. Among this total, computer
investment soared by $93.1 billion, of which $81.6 billion came from the
hedonic spin.
Each additional
dollar spent on computers in the real GDP accounts during the year translated
into eight additional "chained" dollars, accounting, by the way,
for 26% of real GDP in this time. The difference between the two measures
of business computer investments is exploding. So much for the trumpeted
investment recovery.
As we have
explained many times, these particular dollars are fictitious dollars that
nobody has paid and nobody received. Obviously, such dollars inherently
add nothing to profits.
Putting
it briefly and bluntly: The trumpeted brisk rebound in U.S. business
capital investment is another bullish mirage lacking any serious substance.
Given this
reality, it seems likely that the coming year will find the U.S. "recovery"
neither sufficiently robust nor constant enough to foster true self-sustaining
economic growth in the U.S economy.
Regards,
Kurt Richebächer,
for the Daily
Reckoning |
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