Stephen Roach: US consumers are still in a balance sheet recession
Former Morgan Stanley Chief Economist Stephen Roach isn’t buying the US recovery. The economist, now a Senior Fellow at Yale University, talked to Bloomberg Television’s “Surveillance” earlier today to discuss the US economy, as well as emerging markets, Apple’s stock repurchase and his new book “Unbalanced: The Codependency of America and China.”.
Roach told Tom Keene: “the American consumer remains in the grips of a balance sheet recession.” And he said “demand is being constrained by the American consumer…still overly indebted, saving short, and is reluctant to spend.” …and I would also add still without wage growth, especially given the last two months job growth combine to less than 200,000 jobs.
Real final sales growth aren’t going much above 2% without wage growth, house prices and share price inflation or not. And remember, all of the inventory builds in the second half of 2013 that added growth are actually negative if they aren’t sustainable. All of the US automakers have over 100 days sales of cars on their lots.
Full Video for partial transcript below
Source: BLOOMBERG TELEVISION
KEENE: Steve Roach, so much – I get so much mail on your caution of the American economic experiment. We have a jobs day today. Last month, everybody got it wrong. Why aren’t we too optimistic on our jobs calls?
ROACH: Companies hire when they expect demand to grow, Tom. You’re going to add people and capacity if you’re optimistic about the future. Demand is being constrained by the American consumer, which, contrary to most of the people you have on this show, still overly indebted, saving short, and is reluctant to spend.
KEENE: Critically, so much of the economics disagrees with you; they are most optimistic than Steve Roach. What are the 200,000-plus optimists getting wrong?
ROACH: Well, they’re on the sell side. I used to be on the sell side. So they come on this program to get people to be bullish -.
ALESCI: Exactly. When is Larry going to – Larry Fink from BlackRock going to say that equities are going down? That would impact —
ROACH: No, Larry’s actually been pretty cautious recently on the global outlook. But he’s an exception, not the rule. I think the American consumer remains in the grips of a balance sheet recession. Consumption growth in this recovery has been a lousy 2% following the weakest contraction on record. This is anemic.
ALESCI: Why is the market paying attention to the labor numbers when we know that the participation rate is really in flux here and down?
ROACH: Well, the market’s looking through the household survey, focusing on the payroll survey as being a good gauge of industrial and overall aggregate economic activity, huge distortions by weather and other gyrations [of it].
KEENE: Right. But this – Cristina brings up very nicely the ambiguity in the research and that some people will look at the labor participation rate and say, “Well, we’ll adjust this or adjust that, it’s really not that bad.” And others, to your point, speak of a much higher unemployment rate. Why do economists argue so much about the countable thing, which is jobs? People have jobs or they don’t. Why the ambiguity?
ROACH: Well, that’s a fair question, Tom. I think the bulk of the profession wants to believe that the worst is over, that recovery is in hand. There is a secular stagnation group that has the other side of that, and I’m certainly more in that camp.
KEENE: This matters now to our guest host, Stephen Roach of Yale University. Good morning, everyone. His new book is “Unbalanced – The Codependency of America and China”. Dr. Roach has been on the Asia watch for decades. He considers the next America, and in “Unbalanced” he considers the next China and Asia. Of course, with Yale University, can’t say enough about “Unbalanced”.
You talked here, as Catherine Mann does at Brandeis, about a codependency. Who’s the more troubled nation, America or China?
ROACH: I think we are because China has figured out that codependency is not sustainable. They are rebalancing, they’re adopting a new consumer-led model which will make them less dependent on America than they are today. What are we doing, Tom? We’re trying to go back to the well for the same old growth story, thinking that we can get cheap goods from China and they can buy our Treasuries and provide us with saving, and it’s not going to work that way in the future.
KEENE: One of my young staff members the other day, we were talking about Jonathan Spence, legendary at -.
ROACH: Oh, yes.
KEENE: – Yale University. You and I have read Professor Spence’s work. That’s from another time and place, that’s ancient history. I would suggest the US is still back in the time of Chiang Kai-shek and of MacArthur. How do we get out of our past, our skeletons in the closet with China?
ROACH: Well, there’s this tension between old Cold War politics and new post-Cold War economic realities. We need a new source of growth in the United States. The consumer is not going to do it, exports will. China’s our third largest and most rapidly growing major export market. We need to be able to rebuild our competitiveness and sell into this new consumer-led Chinese economy.
KEENE: Should they be allowed to buy minority or majority positions of America’s famous corporations?
ROACH: Well, they’re doing it right now. They just did an acquisition of Smithfield Ham in Virginia. And they’re not taking the companies back to China, they’re injecting capital into companies and that’s generating jobs and economic activity.
KEENE: I know Elizabeth Economy out with a new book as well. The pollution in China has reached a tipping point; you know that better than anyone. How will China respond to what seems to be just horrific air quality?
ROACH: Well, they are responding, but it’s not going to take place overnight. They’ve got emissions trading schemes now up and running in Shenzhen, Shanghai, Beijing, so they do have a carbon tax that needs to be raised. They’re aggressive on alternatives. They’ve got a big uphill battle to wage though, Tom.
KEENE: Yes. Stephen Roach with us with Yale University and, of course, decades in China. The new book is “Unbalanced”. Coming up on this jobs day, we’ll look at Stephen Roach’s false dawn, the idea of most of America in consumption, not the fancy people on the island of Manhattan, but across America, the challenge of the American consumer.
KEENE: Stephen Roach with us. Very quickly, Dr. Roach, you look at this debate of is it Janet Yellen or Ben Bernanke’s fault or is it irresponsible emerging markets getting themselves once again into a tenuous position? Which is it?
ROACH: Shared responsibility, Tom. The Fed kept –
KEENE: A punch bowl going -.
ROACH: – at the feeding trough. They did not do the structural adjustments. They ran big current account deficits, at least in most of them, except China. And now they’re paying a price for that.
KEENE: Can the IMF be the adult in the room?
ROACH: No. They’ve failed at that now for a long, long time. They have no enforcement mechanism. They do this sort of multi-lateral surveillance and early warning signs -.
ROACH: – but what do they actually do to change behavior? Without any enforcement mechanism, nothing.
KEENE: This talks about the lack of animal spirits in America, diminished real growth, diminished inflation, lower nominal GDP, where corporate officers say, I’m not going forward with that acquisition or investment, so I’m gonna buy back shares.
ROACH: Look, Tom, Apple’s a fantastic company. They have invented new products in new markets. I’d much rather see them put their cash to work in pushing the envelope in innovation.
KEENE: Where? Where would you like to see them?
ROACH: I’m not the innovator. It could be Apple TV.
KEENE: But, did they build a factory in Malaysia, and not create American jobs?
ROACH: You’re getting very political here. I want them to innovate. I leave the decision on where to source the output up to the managers of the company. But I want them to innovate new products that make our lives better, more productive, and easier to manage. That’s what they’re good at.
ALESCI: This morning, there were a lot of comparisons being made between Apple and Google, because Google is using its’ cash to make these innovative acquisitions. When you look at Nest, it is all about the connected home.
KEENE: But away from Apple, the serious point here, as we go forward 12 months, Paul Sweeney, this isn’t about Apple. Every company, not getting the press of Tim Cook, is choosing to buy back shares. Does that take away the innovation and investment in jobs Dr. Roach is talking about?
PAUL SWEENEY: I think it very well might be. I think it’s really dependent upon the industry and where that industry is in its growth curve. I think the technology industry, which presumably should have a lot of areas to invest its capital, to drive growth, so when they don’t have those areas, it just kind of shows in the marketplace that maybe they are becoming less of a growth story and maybe more of an income story and that’s a message they typically don’t want to send to the marketplace.
SCARLETT FU: The added wrinkle to all this is that equity markets have gone up a lot. They’ve run up a lot in 2013. So, it’s expensive to make acquisitions with stock. It’s also expensive, to Cristina’s point, to buy back shares too. I mean, this is not this is not the best use of cash either for acquisitions or for buybacks at this point.
ROACH: We’ll never know. But I guarantee Steve Jobs would never buy back shares. He’d put it in the next product.