Last night on Hardball with Chris Matthews, he commented on the real possibility of a double-dip recession and his belief that President Obama and his Administration are likely fully aware of this possibility and that they will have a plan in place to avert further financial disaster. Chris Matthews is one of many commentators who have acknowledged the possibility of a double-dip recession projected some time between 2010 and 2012.
The basis for the belief is that when the unprecedented government stimulus measures implemented in 2008 and 2009 run its course, the economy will begin slipping back into a period of declining GDPs. (At some point, when I have a little more time, I will provide a general recount of the U.S. Government's efforts to stimulate the economy over the past decade, and how these efforts created multiple bubbles fueled by unsustainable growth.) The projection of a double-dip recession is rational, as I will explain below.
For the U.S. to avert another serious financial crisis, sustainable growth must fuel the economy. What sector of the U.S. economy will that growth come from? For the most part, domestic growth for large corporations has been stagnant for years. Emerging markets have been the place of growth for many of the largest corporations; this emerging market growth has played a large part in propping up lofty valuations of publicly traded stocks over the past decade. There are numerous examples that can be given.
Just one small example is Papa John's Pizza (Ticker: PZZA). Go back to its financial numbers before the economy nearly collapsed - in its May 2008 quarterly numbers it reported domestic revenue growth at roughly 10%. Having followed the company for years, I can tell you that 10% domestic growth is at the high end of the spectrum for the company (by the way, most U.S. companies would love to have Papa John's domestic growth numbers - the majority of companies have struggled for years to put up even marginally positive numbers in the domestic market). Despite these robust domestic numbers, the pizza maker's international revenue growth significantly outpaced the domestic market by growing roughly 28%. Where is much of this international growth coming from for Papa John's? China. Some argue that emerging markets such as China, Brazil, and India can be the catalyst to keep the U.S. economy from a double-dip recession as new middle classes in these markets consume more goods. The problem is, as we saw in the 2008-2009 recession, where the U.S. economy goes, so to does the global economy. While this dynamic should change over time, as of yet, consumers in emerging markets still have nowhere near the buying power of their U.S. counterparts.
If the U.S. is going to avoid a recession in the next few years, the remedy has to come from within its marketplace. However, as highlighted with Papa John's, the U.S. marketplace is much more mature in comparison to emerging markets, with few growth opportunities. While there are some industries with robust opportunities in the domestic market in the years ahead - these include biotechs, nanotechs, some e-commerce and Internet-based companies, environmental/energy efficiency products, and health/medical care (if the current version of the Senate bill for healthcare reform is passed) - these alone, are not currently broad enough to put the U.S. economy into positive territory over a sustainable period of time.
Where will the growth come from in the next couple of years? Autos? Forget about it. From 0% financing deals over the past decade to the Cash-for-Clunkers program, the U.S. consumer is tapped out with its car purchases. Real Estate? Again, historically low interest rates coupled with government incentives for home buyers put a record number of home owners into the market. Simply put, over the next year or two, domestic growth will not be driven by the private enterprise - it will come from the U.S. Government and the remainder of its stimulus funds. But these funds are largely expected to dry up by 2011 if not sooner. To replace this stimulus, it is hoped that the U.S. consumer will inject spending growth into the market. That's wishful thinking. Consider that roughly 80% of U.S. households already have at least one credit card (the other 20% either doesn't want one or is unable to obtain one); most households have on average over 5 credit cards. The average credit card debt per household is over $8,000. The combination of high credit card payments, mortgage payments, auto loans payments, high health care costs, and for some, extremely high student loans, the U.S. consumer simply does not have the flexibility to fuel sustainable growth for the U.S. economy.
Given this reality, I put the likelihood of a severe double-dip recession at 80%. That 20% chance of averting further financial pain is the unknown possibility of emerging industries (nanotech, energy efficiency products, etc) to provide a new generation of growth sooner rather than later.
In light of the challenging economic growth over the next couple of years, what measures can Congress and Obama's Administration enact to avoid a recession? Can it lower interest rates? No - interest rates are as low as they can possibly go. Can it issue new debt to stimulate the economy? Unlikely - the U.S. Gross debt is about $12.9 trillion; in 1980, just prior to the 20-year bull market cycle, the U.S. Gross debt stood at less than $1 trillion. The U.S. Government, like the U.S. consumer, is cash strapped and debt laden. The Obama Administration simply has few, if any, options available to avert another recession in the near term.
Structurally, over the long term, the U.S. must change its ways to bring in a new era of economic growth. First, there must be a period of massive deleveraging, where consumers, banks, businesses, and local, state, and federal governments reduce the consumption of debt. Second, new high tech growth industries within the U.S. (think nanotechs, biotechs, etc) need to emerge as major global powers (and these industries, once they emerge, must keep their manufacturing facilities in the U.S. and ship their products abroad). For GDP growth to be sustainable, it is imperative that the U.S. be a place that actually produces goods, and can sell these goods in markets around the world. This can happen, but it will require diligence, innovation, a robust venture capital market, a revamped education system, and ultimately, it will require time.
Time, unfortunately, is ticking on the currently unsustainable U.S. economy.
Peace
JMac
