A Tale of Two Economies
Is the economy slowly trudging toward recovery or is it poised for yet another collapse? It depends on whom you ask: Two economists provided differing views of the nation’s financial future.
On the optimistic side, economic conditions in the United States have “stabilized,” according to Andrew Busch, editor-in-chief of The Busch Update and global currency and public policy strategist for BMO Capital Markets’ investment banking division in Chicago. “It’s not 2008,” he said, referring to the year the most recent recession began. “For those looking in the rearview mirror, it’s not catching up—it’s getting further away.”
He cited growth in gross domestic product (GDP) at 2.8% and recent unemployment figures falling, with recent reports adding 204,000 jobs. Firms less than a year old should be credited for the new jobs created, he said, and that government needs to ultimately grant tax advantages for all corporations to keep the economy on the right track.
On a more pessimistic note, several economic signs point to yet another economic downturn to come, suggested Walter Zimmermann, vice president and chief technical analyst for United I-CAP. “Striking parallels exist between current trends and 2007 [leading up to the recession],” he said. “Investors are bullish and complacency is rampant.”
Market signals on the S&P 500 regarding commodities resemble July 2008, when the last economic bubble burst. In addition, the derivatives market, which played a critical role in the last downturn, was at $500 trillion in 2007 and today is at $710 trillion.
One of Zimmermann’s biggest concerns was median household income, which he described as having fallen sharply. “Billions of dollars are being poured into [nontraditional] advertising like Twitter,” he said. “But what if the problem is median household income? Can Twitter meet expectations?”
The goal of advertising is to generate new spending, Zimmermann pointed out, but what if the middle class simply doesn’t have more money to spend? Then there’s a disconnect. Showing a chart plotting income compared to upward mobility, he said the United States has a divergent pattern, with incomes high but mobility being one of the lowest in the world.
Offering a more optimistic view, Busch said that globally, conditions look promising, especially in China, where enough progressive forces are in play to potentially privatize land. Such a move in a traditionally communist nation rich in property could be key to that country’s prosperity.
The panel’s moderator, Richard Karlgaard, publisher of Forbes magazine, also added his perspective to the discussion, citing that the “top line” view was essentially not good. He said annual growth during the current recession was 2%, whereas in past recoveries it was 3%.
Karlgaard characterized the current recovery as having a wide “disparity” in that some parts of the country or even parts of any given state are experiencing record growth, while others are at the other extremes in hardship. In parts of North Dakota where the energy sector is booming, he said, fast-food cashiers are making $20 and hour, compared to cities such as Stockton, Calif., which is experiencing 20% unemployment.