Richard Koo: a personal view of the macroeconomy
Whither the patchy US recovery?
Last week, US share prices rose on continued expectations of an economic recovery. OnFriday, however, the Goldman Sachs news and fresh doubts about the strength of the economysent the stock market lower.On the policy front, Fed chairman Ben Bernanke testified before the US Congress. He notedthat while the economy was experiencing a gradual rebound, numerous problems remained,including the real estate market and the credit crunch.The Fed also released its
survey of regional economic conditions last week. Whilethe general tone of the report pointed to a modest recovery, many districts were characterizedby a mixture of strong and weak data. In some districts, even the report’s authors seemedunable to determine whether the economy was advancing or retreating. In my view, thissuggests that the US recovery is still patchy at best.
* Bernanke far more cautious on economy than market participants
Turning first to Mr. Bernanke’s testimony, the Fed chairman adopted a cautious tone comparedwith the market’s strong expectations for recovery. He began by saying that the 5.6% GDPgrowth reported in 2009 Q4 (q-q annualized) was a sign that the inventory adjustment thatfollowed the Lehman crisis had finally ended and that production was once again expanding.However, the flip side of this view is that the recovery in production may be only a temporaryphenomenon that will end once manufacturers complete their inventory buildup. In other words,the economy could stall again unless private final demand picks up. The Fed chairmanspecifically pointed out this possibility in his testimony.Mr. Bernanke also argued that the economy has been supported by demand from a very largefiscal stimulus, but that private demand will become more important as the stimulus winds downbetween now and end-2010. In a sense, this was a warning that we should not expect theexisting demand structure—which is reliant on government spending—to persist.A look at the seven-page manuscript for Mr. Bernanke’s speech shows only the first page and ahalf devoted to positive economic news, while most of the remaining 5 1/2 pages deal withpotential risks and appropriate responses. I think Mr. Bernanke is being careful not to take toooptimistic a view of the current situation.While noting that the jobs situation is finally improving, for example, the Fed chairmanexpressed serious concerns about the fact that, as of March, a record 44% of the unemployedhad been without jobs for more than six months.Historically, people unemployed for more than six months experience a significant deteriorationof vocational skills and face severe difficulties in finding their next job.
* Bernanke has begun to talk about decline in private loan demand
Mr. Bernanke also argued that a key cause of the continued drop in US bank lending to bothindividuals and businesses is falling loan demand, which he attributed to the weak economy andto the fact that many borrowers are in such a poor financial position that they are no longer ableto borrow.I was hoping to see a more direct acknowledgement that soft loan demand was attributable toimpaired private-sector balance sheets. Nonetheless, the Fed’s latest
Senior Loan Officer Opinion Survey
, referred to by the chairman in his testimony, highlights a continued decline incorporate loan demand. Although the scale of the decline has eased compared to before,survey respondents still indicated that demand for commercial and industrial loans hadweakened over the past three months (Exhibit 1).
Nomura Securities Co Ltd, Tokyo
Economic Research – Flash Report
20 April 2010
(issued in Japanese on 19 Apr 2010)
Chief economistNomura Research Institute, TokyoNomura research sites:www.nomura.com/researchBloomberg: NMR
Please read the importantdisclosures and disclaimerson pages 10–11.