Mar 24, 2010 11:33 am


Passover is coming and some economics writers have Pharos on their mind. FT's LEX teamwonder how much milk is left in the American economic cow?

Seven fat years followed by seven lean is the biblical standard for booms and busts. It might be tempting then to ask what sort of famine lies ahead for the US. One of the more remarkable facts about recent history is that, for all the exuberance of stock and property markets, the last seven years were a rather thin time for the American economy.

From the trough of the 2002 recession – as measured by the National Bureau of Economic Research – to that in 2009, real US gross domestic product grew on average only 1.7 per cent a year. The Federal Reserve Bank of Atlanta calculates that only straight after the second world war, when the economy shrank in real terms, has growth been weaker in any trough-to-trough period since 1933.

More concerning for the prospects of recovery, however, is the recent gap between real consumption and income growth, also the second worst on record. For seven years, real spending grew by an average 2 per cent a year, while incomes grew at half that pace. A steady decline in the personal savings rate to a sub-1 per cent low in 2008 helped to keep shoppers busy. Now, however, saving is again rising while high unemployment is keeping wages in check.

Furthermore, during the 1991 to 2001 period, when real economic growth was almost twice as fast, US inflation declined from 6 per cent to almost 1. As studies suggest a fall in inflation can permanently boost output, the great moderation itself helped to keep economic growth ticking over. Unfortunately, with inflation now conquered and falling prices the great worry instead, this trick cannot be repeated.

So even if the US does see a “V”-shaped recovery, sustaining growth will require a top-notch performance. But for the past seven years, American consumers and businesses had the benefit of tax cuts, expanding credit, low interest rates and inflation and massive stimulus spending. There may not be much milk left in the cow.

This is hardly news for Americans. 79% tell pollsters that U.S. Economy Could Collapse under the combined weight of the debt and big government.

The latest Fox News poll finds that 79 percent of voters think it’s possible the economy could collapse, including large majorities of Democrats (72 percent), Republicans (84 percent) and independents (80 percent).

Just 18 percent think the economy is"so big and strong it could never collapse."

Moreover, 78 percent of voters believe the federal government is"larger and more costly" than it has ever been before, and by nearly three-to-one more voters think the national debt (65 percent) is a greater potential threat to the country’s future than terrorism (23 percent). At the same time the number saying the White House doesn’t have a plan for the economy has increased from 53 percent in July to 62 percent in the new poll. That includes almost all Republicans (88 percent), two-thirds of independents (67 percent), as well as a third of Democrats (33 percent).

Even fewer people think Democrats in Congress (24 percent) and Republicans in Congress (16 percent) have clear plans to fix the economy.

Recovery depends on Main Street writes Obama supporter, Robert Reich. But main street is spooked by unknowable health care costs and the prospect of new taxes and all Obama does is print money and give it to the rich:

Optimists also point to rising stock prices that supposedly make consumers feel wealthier. But the net worth of most Americans is tied up in their homes, which are worth less than in 2007. The “wealth effect” is relevant to the richest 10 per cent of Americans whose net worth is mostly in stocks and bonds. The top 10 per cent accounted for about half of total national income in 2007, but they represent only 40 per cent of total spending. A sustainable recovery cannot be based on the top 10 per cent.

Unemployment or fear of it continues to haunt the population. That is a major reason consumer confidence is still dropping. There is also the extra need to save as boomers face retirement. Given all this, it is sensible for Americans to continue holding back from the malls, but this means a painfully slow recovery. American consumers account for 70 per cent of the total demand for goods and services in the US economy, and a sizeable chunk of world demand.

The economy shows signs of improvement largely because the government is spending huge sums and the Fed is essentially printing even more money. But where will demand come from when the stimulus is over and the Fed tightens? That question hangs over the economy like a dense cloud. Until there is an answer, a sustainable recovery for any other than America’s largest corporations, Wall Street and the wealthy is a mirage.

In other words, Atlas is shrugging with predictable consequences.

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