November 10, 2003


Stephen Roach is still gloomy. I'm still gloomy about unemployment, but it's hard to be gloomy about other aspects of the economy given the very strong productivity growth trend:

Stephen Roach: ...As of October 2003, the private job count was still down nearly 1% from the level prevailing at the official cyclical turning point in November 2001. By my reckoning, that still works out to a cyclical shortfall of close to 7 million jobs — the number of Americans who would have been at work in the private sector had the current hiring recovery conformed to the cyclical norms of the past. In short, while the US appears to have transitioned from a jobless to a job-short recovery, it’s a real stretch to argue that hiring has now reached the critical mass that sparks cumulative cyclical increases in the real economy....

in my view, there are some equally critical differences between the state of today’s US economy and conditions prevailing in the upturn of the early 1990s — differences that challenge the notion that a comparable transition is about to begin. That’s especially true of consumer balance sheets: Today, household sector debt stands in excess of 80% of GDP, well above the 65% reading in 1992 when the last jobless recovery first started getting traction; moreover, despite extraordinarily low interest rates, household debt-service-to-income ratios currently stand at around 14%, far in excess of the 12% readings that facilitated expansion a decade ago. Moreover, today’s record 5.1% current account deficit is in sharp contrast with the virtual balance inAmerica’s external accounts that was evident at the onset of the recovery of the early 1990s. At the same time, the private sector’s net saving rate — consumers and businesses, combined (net of depreciation) — stood at 8% a decade ago, double the anemic 4% rate of today; that underscores the diminished reservoir of funds that the private economy has at its disposal to finance economic recovery.

But that’s not all. In today’s US economy, there’s a veritable lack of pent-up demand in the two sectors that normally spark cyclical upturns; consumer durables currently stand at a record 11.4% of GDP versus a sub-7% reading in the early 1990s, and residential construction has moved up to a cycle high 4.3% of GDP versus a 3.3% reading a decade ago. Lacking in classic sources of pent-up demand, America is more than ever in need of new sources of growth. And, finally, there are the persistent imbalances of a lopsided global economy. With its China-like GDP growth of 7.2% in 3Q03, the US growth engine is once again accounting for the bulk of the improvement in the global economy. While the rest of the world seems to be more than delighted to finance this outcome with open-ended flows into US Treasuries, current-account, dollar and interest rate risks continue to build that could well jeopardize the macro climate in the not-so-distant future (see my November 7 dispatch, “Yet Another New Paradigm”).

All in all, the proverbial glass still looks half-empty to me...

Posted by DeLong at November 10, 2003 07:43 PM | TrackBack


I've been wondering about something with regard to the rise in household debt. What impact, if any, has the skyrocketing cost of undergraduate and graduate education, along with the decline (I think) in federal direct aid, had on household debt? I had never thought about this until the other day when I was talking to a friend of mine and realized that she was 26 years old and had a net worth of negative thirty thousand dollars (from college and grad-school).

I guess what I'm really wondering is whether the rise in the college-age population and the rising cost of education are skewing the debt numbers, making them look worse than they are (since education debt is the result of an investment in future productivity, rather than consumer spending, and since it's repaid at a very low interest rate: I think most of my friend's loans are around three percent). It's possible, perhaps even probable, that there just aren't enough students (or parents of students) for it to make a difference, but I thought someone might have ideas about this.

Posted by: James Surowiecki on November 10, 2003 08:47 PM


For the vast majority of people in the world the only thing that matters in the economy is the employment market - how many jobs there are, how well they pay and what conditions you have to work under. That's it, that's all.

Posted by: Ian Welsh on November 10, 2003 09:50 PM


Well ok, how cheap stuff is also matters. But that's subsumed under "how well they pay".

Posted by: Ian Welsh on November 10, 2003 09:56 PM


Any thoughts about Smoot-Hawley II (i.e., the likely effects of European penalties in retaliation for illegal US tariffs?).

It's fine to be sanguine about the economy in the short run. And 6+% unemployment is not far above historical norms. But in the not-very-long run bills are going to come due: fractured international relations, occupation, deficits, loss of hope and national direction-- all of these have associated costs. If a real trade war gets started, count me in with Roach and gloom.

Posted by: Charles on November 10, 2003 11:54 PM


James, the big long-term question on education debt is how high the actual payback will be.

For example, the payback from an IT degree has got to have dropped over the past four years. Similarly with engineering, accounting, and other formerly-highly-marketable-but-now-outsourceable degrees.

Now, these degrees might still be worth pursuing, but they could easily be much less worth pursuing than earlier. A $40K/year, no benefits because you're a temp-worker BS in computer science would not be worth the student loan debt that a $70K/year+lavish benefits+stock options BS in computer science would be.

Posted by: Barry on November 11, 2003 05:15 AM


James, the Fed's consumer credit (G.19) data show student loan debt to have roughly doubled over the last five years, though it's been flat over the last year. That accounts for about 10%-11% of the overall rise in consumer credit. (For the 2003-2004 school year, Sallie Mae estimates educational lending -- mostly federal student loans -- will be ~$55 billion.) That's presumably not all of the rise in education-related debt, but seems to offer an order of magnitude figure.

The economist in me is inclined to accept your characterization of the increase in student loan debt as at least partly reflecting increased investment in human capital. Any particular student's debt can (potentially) be economically justified -- so I won't worry about the shocking debt loads of some newly minted doctors (though visits to the local large public university campus make me think that some of the undergrads could benefit from less consumption and more studying). Some of it presumably also represents consumption smoothing, and not least it is also symptomatic of what amounts to big federal and state tax increases on higher ed students.

Posted by: Tom Bozzo on November 11, 2003 05:30 AM


Some of the boom in debt is due to housing purchases and refinancing. Converting massive credit card debt at 12% to a tax deductable home equity loan for half the interest rate accounts for some of the credit increase. Plus people moving up to larger more expensive homes that became affordable when the interest rates dropped.

The debt load on a 1980s $50,000 house was much less than a 2000s $200,000 house.

James is correct that the large amounts in student education loans reflects an underinvestment in education by government. This is a drag on the economy because it discourages many people from pursuing the training they need to be more productive. As a result, we import talent for some of the more productive jobs and have to find less productive, lower paying jobs for undertrained American workers.

Posted by: bakho on November 11, 2003 05:39 AM


Doesn't the U.S. spend more than any other country on education on a per capita basis and is second in education spending as a percentage of GDP?

Posted by: Joe Blog on November 11, 2003 06:24 AM


Better not tell Mickey Kaus that Krugman isn't the only dour economists, it would ruin his world view.

Posted by: Rob on November 11, 2003 08:38 AM


Part of what bothers me about the shift of the financial burden of higher education from government to individuals is that there increasingly seems to be nothing resembling an education policy (even a bad one) behind it. Rather, it's increasingly that state legislatures with anti-tax leanings of one degree of intransigence or another are more pliable when it comes to raising tax-like fees such as tuition at state universities. As bahko suggests, it's hard to see how rapidly raising the private cost of a college education constitutes a sensible long-term growth policy.

For the bigger picture, it's not especially radical to think that the upside and downside risks are 'roughly equal':

Posted by: Tom Bozzo on November 11, 2003 08:47 AM


Is it safe to say that Mr. Roach has been wrong almost the last 12 months. Is Mr. Roach's job to pontificate about various theories and numbers or to give his clients insight onto the direction of the economy and by extension the markets? If it's the latter and you listened to his advice you are poorer than you would otherwise be.
Hey, I read his stuff religiously but it seems that this website might be able to use some of the commentary of Tony Crescenzi of Miller Tabak who has the benefit of having been right for some time.

Posted by: William Utley on November 11, 2003 09:17 AM


All in all, the proverbial glass still looks half-empty to me...

The glass is neither half-full nor half-empty; it's twice as big as it has to be. But that's the engineer talking.

Posted by: David Perron on November 11, 2003 09:43 AM


All in all, the proverbial glass still looks half-empty to me...

The glass is neither half-full nor half-empty; it's twice as big as it has to be. But that's the engineer talking.

Posted by: David Perron on November 11, 2003 09:48 AM


Wall street economists are paid to have a point of view, and it is not necessary to be any more right or wrong than someone else. Managers can pick and choose from the various scenarios they
feel like. Roach was more right than most for a very long time. Yes, he has appeared off base for the last year, but that does not mean that his bearish point of view will not prove more accurate in the near future. Remember, every time someone buys, sell a stock on the premise that the price will go diferent directions, one person in that transaction will be wrong.

Posted by: Spencer on November 11, 2003 11:00 AM


"Wall street economists are paid to have a point of view, and it is not necessary to be any more right or wrong than someone else."

Great work if you can get it. How many other jobs are like except for academic positions?

Posted by: William on November 12, 2003 07:18 AM


One connection I have not seen made, even by gloomy guys like Roach, is the possibility that the recent pick-up in employment is a direct result of the pick-up in growth in Q3, nothing more. That is to say, recent jobs gains were bought with tax rebate checks. We know that employment is coincident-to-lagging (depending on the series) and we know that nobody is expecting growth in Q4 or H1 of next year much beyond half what was seen in Q3. If 7.2% output growth was needed to provoke a 286k rise in payroll employment, then massively above trend output growth was needed to induce job growth not quite adequate to absorb 94% of new job entrants (despite what the jobless rate seems to indicate). Is hiring in response to underlying forces, or strains induced by short-term conditions?


To the extent education spending represents an investment in future productivity, it is a good thing. That, however, is about as far as I would want to push the argument. As Tom B’s response shows, there has been a marked rise in debt associated with education, without any reason to think that the return to education has gone up. The return on investment in education has thus dropped due to a rise in the cost of education. I don’t mind having the marginals line up in education spending, but I would rather see it happen as a rise in demand for education reduces the marginal benefit to the level of marginal cost, rather than the other way around.

I think Joe Blog is right about rank ordering of education spending, but I think the US also ranks pretty high on R&D spending, as well. Together, those facts may help account for the US position as technology leader. In the present discussion, it is spending on higher education, rather than overall education, that matters. There are serious problems in delivering value per dollar at the primary and secondary level, where a very large share of education spending goes, but little of that is paid for through private borrowing. Spending per capita at the primary and secondary level is not rising nearly as fast as at higher levels of education.


You’re right, but that doesn’t help those of us who aren’t on Morgan Stanley’s payroll.


Crescenzi is a semi-deity, far better at calling the market, for instance, than Gross or McCully at Pimco, who have far higher profiles. He has an advantage over Roach, or any other economist who is actually commenting as an economist, when it comes to markets. Markets needn’t reflect economic fundamentals in the short or even intermediate term. No economist could have reasonably recommended buying stocks in 1998, based on anything economic analysis told them, but “buy” remained the right call for several quarters.. Tony, as a market analyst, can legitimately factor market sentiment, charts, investment flows and the like, into his analysis, without pretending to be something he isn’t. Very often (for the reason Spencer mentions) investment house economists wander well outside their area of expertise to make market calls.

Posted by: K Harris on November 12, 2003 07:35 AM


Spencer: not everyone sells a stock because they think the price will go down. Some people just need the money so they sell a stock to get the money. Many, many people are not so lucky to be able to buy and hold or have the budgets to actively trade simply for speculative purposes. But it seems to me that the bigger role Roach is playing is to make sure that everyone has their eyes open. As an institution, Morgan Stanley also has an obligation to discuss all scenarios, not just it's a bull market, buy, buy buy. Wealthy people like to preserve their assets as much as make huge returns on investment. No MS client can then come complaining that MS did not give a full picture of the current thinking on the economy. I bet you there are more than a few smaller investors out there who wished they followed Schiller's advice and Krugman's critique of Dow 36,000 and sold rather than experience the carnage of the bubble bust. I have several friends who used to brag to me that they were millionaires who now bitch about making ends meet and become depressed about the prospect of having to work another 25 years to retire rather than 15. So Roach has a role within the organization to protect MS as an institution, not just cheer lead for the stock market.

Posted by: Cal on November 12, 2003 10:17 AM


Oops. Apparently there is one guy out there who thinks the recent rise in employment is purely the result of short-term stimulus. John Challenger, the out-placement guy who publishes monthy layoff announcements, has compared this year's late employment rise with that of 2002, which he notes "quickly dissipated in the New Year after the economic stimulus wore off." I thought the jobs slump also had something to do with the prospect of war, but what do I know?

Posted by: K Harris on November 12, 2003 11:10 AM


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