Few options available for getting financial houses in order.
Moffatt & Nichol
Although the U.S. economy is officially in a growth phase, in reality the downturn engendered by the Great Recession has not ended, mostly because structural problems of the U.S. economy haven’t been resolved.
Likewise, across the Atlantic, structural problems of the Mediterranean economies are not being addressed.
Economic growth trends remain divergent between emerging markets like China, India and Brazil and developed economies such as the United States, Europe and Japan. The former are nearly half a business cycle ahead of the latter, and have already had to raise their interest rates to slow their economies and reduce inflation pressures. Since emerging markets have been a growing source of demand for U.S. exports, their efforts to slow their economies impacted economic growth here. In some places, like Brazil, this is being reversed.
Capital equipment is a significant share of exports to emerging markets. While these exports have grown, this trend may not last. It’s important to recognize that infrastructure investment must eventually produce a return. Despite sustained high economic growth rates in emerging market economies, their consumers’ buying power insufficient to generate the required return.
The United States and Europe are still the bread and butter for emerging, export-oriented markets. For the global economy to successfully avoid a double dip or a second downturn, they have to deal with the structural problems that are holding their recovery back.
In Europe there hasn’t been a full accounting of the Mediterranean countries’ financial problems. These countries used means including derivative and currency transactions to reduce their debt-to-GDP ratios in order to join the European Monetary Union. Ultimately, these transactions were sovereign debt, and Europe remains dependent on Germany to fund the Med rescue efforts.
European leaders also see the conflict between austerity and growth-oriented policies. It may require allowing governments like Greece leeway to increase deficits so economies can recover faster. The EU must decide if growth is the priority.
In the United States, extending unemployment benefits and providing funding to keep teachers and first responders employed helps reduce the drag that government budget cuts have had on the recovery. Since the official end of the recession in June 2009, state and local governments have laid off about 550,000 employees. Investing in school improvements should also reduce the unemployment rate among construction workers. Immediate funding, $50 billion, for highway, transit, rail and aviation projects should also help, perhaps making up for the rather insufficient funding of the Transportation Infrastructure Generating Economic Recovery program, which amounts to less than $2.5 billion.
While the new jobs bill would give necessary lift to avoid a prolonged second contraction in economic activity, it doesn’t deal with the underlying cause of the recession. Household total debt to income reached a post-World War II record of 130 percent before the recession began. Much of the increase occurred during the housing boom of the last decade. However, consumers are deleveraging a lot more income, and a lot more saving (debt payment
) is needed before the debt-to-income ratio declines to a more sustainable level.
The underlying factor is the residential real estate market. Lower interest rates have attracted buyers but tight lending standards, and given one in every 12 mortgages is delinquent, means the market is far from stable. Policies oriented towards reducing debt servicing on households are necessary to stabilize the market and reduce the drag on recovery. As it stands, people who are offered jobs requiring them to move are likely unable to accept the offer because they may not be able to sell their homes, and companies are unlikely willing to finance the relocation if the mortgage is underwater.
Alleviating the financial burden on households is necessary for economic growth to become self-sustaining, but most likely would not result in a dramatic rise in economic activity. Data indicates households have a lot of work ahead of them in order to get their balance sheets in order. Furthermore, many heads of households are getting close to retirement.
Import growth is therefore likely to be muted compared to the last decade. Companies and institutions in the freight movement industry would do well to focus on exports in order to diversify their business.
Walter Kemmsies is chief economist of Moffatt & Nichol, a marine infrastructure engineering firm. He can be reached at (212) 768-7454, or e-mail, email@example.com.