Yes, we know the green shoots have taken root as the global recession relaxes its grip on the major economies and the prospects for a hesitant recovery improve.
But it’s not a recovery yet, and when it comes, it won’t feel like one, says Fed chairman Ben Bernanke.
Investors and stockmarket analysts could do well to read (or re-read) the remarks by the Fed chairman before the US Congress today to get a realistic handle on the growth prospects for corporate America over the next three years. It’s not going to be easy and it’s not going to be done according to their models for companies and the economy.
In fact, the US economy is going to crawl for the next couple of years and faces another three years of high unemployment, which will in turn hit consumer confidence and spending.
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Mr Bernanke made it clear just how long he and the Fed saw the recovery taking to get up to speed:
The recovery is expected to be gradual in 2010, with some acceleration in activity in 2011.
Although the unemployment rate is projected to peak at the end of this year, the projected declines in 2010 and 2011 would still leave unemployment well above FOMC participants’ views of the longer-run sustainable rate.
All participants expect that inflation will be somewhat lower this year than in recent years, and most expect it to remain subdued over the next two years.
In light of the substantial economic slack and limited inflation pressures, monetary policy remains focused on fostering economic recovery. Accordingly, as I mentioned earlier, the FOMC believes that a highly accommodative stance of monetary policy will be appropriate for an extended period.
On the surface, an extended period of low interest rates is a bullish point: but in reality it’s a recognition that there are going to be no price pressures forcing a rate rise until well into 2011 because of the dampening effects of high unemployment and indifferent demand.
As Mr Bernanke said, “it’s not going to feel like a very strong economy”. His comments elaborated on the more optimistic forecasts contained in the latest minutes of the last Fed meeting which helped set off the rally that started in March. But the Fed chairman was far blunter and more realistic about those forecasts. He was ignored by investors who saw the words “recovery” and “2010” in the statement and exclaimed, ‘”slump over!”
Far from it: the analysts won’t look at the Bernanke comments until too late; they are obsessed with the current reporting season for US companies and seeing better-than-expected results.
And they are, but the smarter analysts are noting that the gains are coming from cost-cuts and lower raw material prices; there’s no growth in demand and even the sightings of an upturn later this year are tentative and based more on hope rather than fact. As well capital is being raised in more and more cases (Intel is the latest example, raising $US1 billion) to finance share buybacks, not new investment. That’s bad news for business investment over the next two years.
The Fed chairman saw an upturn later this year, but his qualifiers that higher unemployment and very tough conditions for US consumers will mean corporate America will find it tough, no matter which sector they operate in.
Not one corporate analyst would have in their models high unemployment until 2012, but that’s what Mr Mr Bernanke said overnight. He said the unemployment rate would be higher than preferred levels until at least 2012. But he he saw steps taken by the Fed to pump money into the economy is starting to have an impact.
“The pace of decline appears to have slowed significantly, and final demand and production have shown tentative signs of stabilisation,” he said.
But even with this improvement, he warned “financial conditions remain stressed, and many households and businesses are finding credit difficult to obtain.”
“Despite these positive signs, the rate of job loss remains high and the unemployment rate has continued its steep rise. Job insecurity, together with declines in home values and tight credit, is likely to limit gains in consumer spending,” Mr Bernanke said.
“The possibility that the recent stabilisation in household spending will prove transient is an important downside risk to the outlook.
“I want to be clear we have a very long haul here,” he said.
“Unemployment will stay high for quite some time.”
And that should be the bottom line for everyone assessing how the US and global economies are going to be travelling. For all the rebound in China and parts of Asia, for all Australia’s new confidence, a sluggish US economy (and Europe won’t be far behind either) will mean a slow and underperforming world economy for the next three years.