Escape velocity for US economy vs Gravitational pull for US unemployment

April 3, 2010 at 12:41 pm Leave a comment

Larry Summers used the term of escape velocity to describe US economy breaking out into substainable growth, thus depending less on fiscal stimulus, although it is still on monetary steroids.

FT Lex column questioned how substainable is this growth when the broadest measure of unemployment, capturing those who give up or take part-time work, stands at 18 per cent.

China is tightening and Europe is moribund. US states must rein in spending. Inventory restocking is largely complete, so businesses need higher sales to generate activity. Ample spare capacity means industry can survive with little investment. Small businesses, responsible for almost half of recession job losses, need to seek credit from regional banks feeling nervous about commercial real estate exposure.

So once again the consumer must set the pace. Yet while spending has improved in recent months, it appears to have been funded by savings. while the US net saving rate has risen from 1 per cent of disposable income two years ago, the shift is due to a collapse in consumer borrowing. Gross levels of saving have actually halved, while wages have continued to decline. With large numbers of unemployed, incomes are unlikely to grow, in turn capping spending.

If you look at the latest payroll report, the wages barely budge. Asset appreciation is driver of growth but what if interest rates rise?

Entry filed under: Investing. Tags: .

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