"Wageless Recovery" - from Morgan Stanley's Steve Roach

[swag]

http://www.morganstanley.com/GEFdata/digests/20050307-mon.html

Fully 39 months since the last recession ended in November 2001 and the American job machine finally seems to be back in gear. Hiring gains are still not spectacular when judged against earlier cycles, but as underscored by the 262,000 gain in nonfarm business payrolls in February, they have certainly been on the upswing over the past year. Unfortunately, the quality of hiring remains decidedly subpar -- dominated by those toiling at the low end of the pay spectrum. Moreover, an even bigger hole remains in the US labor market: Despite generally sharp increases in productivity since 1995, there has been no discernible pick-up in real wages. The character of America’s recovery has shifted from jobless to wageless -- with profound implications for both the economy and financial markets.

. . .

If that’s the case, there are profound implications for the macro climate. For starters, real wage stagnation keeps American consumers under considerable pressure. Over the first 38 months of this recovery, the wage and salary component of personal income has risen just 5% in real terms -- far below the 14% average gain over comparable periods of the previous five cycles. This dramatic shortfall of real labor income is an outgrowth of both subpar hiring and real wage stagnation. The recent pick-up in hiring is only of limited consequences if real wages don’t rise. It’s largely for that reason labor income has remained under pressure. Such an outcome leaves hard-pressed consumers with little choice other than to keep relying on asset-based spending strategies and going further into debt to fund such tactics. As a result, real wage stagnation is a recipe for persistently low income-based personal saving.

For financial markets, the impacts of real wage stagnation are equally profound. The good news is that real wage stagnation limits labor cost and inflationary pressures -- helping to boost profit margins and constrain any back-up in long-term US interest rates. The bad news is that the resulting shortfall of labor income keeps pressure on the US current account deficit as the principal means to compensate for a shortfall in domestic saving. That ups the ante of America’s imbalances -- putting downward pressure on the dollar and upward pressure on US real interest rates. Persistent real wage stagnation also puts pressure on the political arena, as hard-pressed workers are likely to demand increasingly protectionist “remedies” from their elected representatives; such an outcome would also put the dollar and real interest rates under pressure. My best guess is that prospective trends in long-term interest rates ultimately will be more influenced by the bearish considerations of the current account adjustment and trade frictions rather than by the bullish implications of well-contained inflation. From, time to time, however -- especially during periodic growth scares -- market sentiment could temporarily push bond yields to the downside.

For America, this recovery has been unlike anything ever experienced in the annals of the modern-day, post-World War II era. Record twin deficits and surging debt underscore the heightened vulnerabilities of a saving-short US economy. The need to normalize real interest rates raises warning flags for the immediate future. A new and exceedingly powerful strain of e-based globalization rewrites the sourcing equation as never before. Despite these extraordinary pressures, the hope all along has been that the sustenance of growth would shift away from the artificial support of policy stimulus and asset appreciation back to the organic support of labor income generation. But as the character of America’s recovery now morphs from jobless to wageless, the likelihood of such a “handover” looks exceedingly dubious. That raises serious questions about the hopes and dreams in financial markets of a benign rebalancing of the US and the US-centric global economy.

[Patiod]

1. Weren't 200,000 of those 262,000 jobs in the service sector

including fast food, maids, etc. (Yes, I know there are also good jobs there - I have one)

I'd love to know what % of those jobs include health coverage from the get-go (not "if you stay here 2 years and work 40 hours, which we'll NEVER give you), compared with the average job. My guess is that it's a wage-and-benefitsless recovery.

[DeepModem Mom]

2. Very interesting -- thanks for posting! nt

[ProfessorGAC]

3. I'll Take The Opposing View

Another conventionalist heard from! Boring!

The recession is over, but consumption is down. The recession is over, but unemployment is still 20% relative higher than 6 years ago. The recession is over, but real wages have fallen. The recession is over but CPI inflation, energy price increases & deficit expansion represent >81% of nominal GDP growth. The recession is over, but median household income is down in 2002 dollars.

If the conventional definition of recession allows this recession to be over 4 years ago, but all these negatives to be in place, then guys like this need to rethink the validity of their definitions. But, since most of them haven't given a second thought to theory since the day they graduated (and likely before that), that won't happen.

So, we get this braindead regurgitation every month from one of the econo-harlots or another.

Zzzzzzzzzzzzzzzzz!
The Professor

[ClintonTyree]

4. Very astute observation......................

I'll have to remember those little gems when discussing the economy with my MBA Uncle who thinks everything's coming up roses......well, it IS for him.

[ProfessorGAC]

7. It's Actually Very Simple

Tell your uncle that the economy isn't about him. It's about 285 million of us. I'm doing ok too, personally, but i can take a far broader view than my own bank accounts.

If he thinks things are roses because he's doing ok, he needs to pay better attention to something other than himself.
The Professor

[swag]

5. Nice misguided grouse

that attempts to preclude nuanced discussion.

I applaud you.

[ProfessorGAC]

6. Huh?

I model complex systems, like the macroeconomy, for a living. I'm expanding the discussion, here, because this guy is simply wrong. His understanding of the causative aspects involved are clearly in error, and if they weren't he wouldn't make statements like this.

There's nothing misguided about my post. I clearly described why this econo-whore is wrong. You may be misguided if you think the M-S economist's original article is accurate.

If you have something to add, add it. I did nothing to preclude your opinion. If you have nothing to add, save your insults. I would guess i have as many or more published economic treatises as your hero at Morgan-Stanley.
The Professor

[JHB]

11. Re-read the Prof, swag...

...and my guess is you'll discover you'r actually on the same page:

You posted the article because even a Morgan Stanley economist was saying that there wasn't much "recovery" in the "Recovery".

Prof merely noted that given the facts, where the "Recovery" is breaking all the "rules" about recoveries, and given Mr. Roach's education and profession, he should be ashamed of even using the word "recovery" to describe the present state, that there are so many structural differences from previous recoveries that to use that term in the same sense as previously officially announces to the world that in terms of actually USING the education he's received, Mr. Roach is a "child left behind."

Roach scratches his head in bewilderment of why the plug-in assumptions of his equations are no longer reacting "properly", and Prof smacks him on the head and says "go back to underlying theory, you dunce!"

Nuances are thus expanded, not precluded.

If you beg to differ, please proceed.

[swag]

12. That's okay

I've read the post enough times trying to make sense of it.

I'm moving on.

You're welcome to your assessment.

[ProfessorGAC]

14. None So Blind As Those That Will Not See

There is nothing to be confused about. I provided the parameters that indicate economic ill heath.

The failure to understand is yours.
The Professor

[swag]

16. On re-reading "the prof"

Roach was using NBER definitions of "recession" and "recovery" as many economists, who wish to engage in dialogues with other economists, using a common language and well-defined terms, use.

Roach, though not my "hero," in spite of the claims of your esteemed "prof," has been no booster of either this administration or of the economy said administration seems intent on wrecking. Sorry, no "econo-whore," Roach was among the first to say that "this recovery was rented from Walmart." He routinely derides the current fiscal incontinents in not only the White House but also in both houses of Congress, for adding to the global imbalances that have turned not only the US economy but also the global economy into a house of cards.

I was a bit put off by your "prof" (prof of something, I'm sure, and I would love to read some of his myriad econ papers, as well as peer review of same) hi-jacking a perfectly damning critique of the current recovery, a critique with much promise of discussion, to slander the messenger, ignore the message, and aggrandize himself as the one true authority on economics.

Later you came back and said that I should re-read "the prof" because he and I were on the same page. Why didn't "the prof" recognize that before he posted a damnation of something you think he agrees with?

More an ego problem than a matter of substance, perhaps?

[K-W]

18. Just because alot of people use flawed economic models

doesnt excuse him.

[swag]

20. Does it excuse you

just because a lot of people use unclear antecedents?

[K-W]

22. Did you just start this thread to throw one liners around?

[swag]

23. Was that a one-liner?

[K-W]

25. Obviously.

Now would you care to defend your argument that this economist is right, because others agree with him?

And why are you taking pot shots at everyone who tries to discuss on your thread?

[swag]

27. Since you apparently missed reply #16, even though

you replied to it, I'll repost (and eagerly await the inevitable rebuttal from "the prof's" burgeoning cultist):

Roach was using NBER definitions of "recession" and "recovery" as many economists, who wish to engage in dialogues with other economists, using a common language and well-defined terms, use.

Roach, though not my "hero," in spite of the claims of your esteemed "prof," has been no booster of either this administration or of the economy said administration seems intent on wrecking. Sorry, no "econo-whore," Roach was among the first to say that "this recovery was rented from Walmart." He routinely derides the current fiscal incontinents in not only the White House but also in both houses of Congress, for adding to the global imbalances that have turned not only the US economy but also the global economy into a house of cards.

I was a bit put off by your "prof" (prof of something, I'm sure, and I would love to read some of his myriad econ papers, as well as peer review of same) hi-jacking a perfectly damning critique of the current recovery, a critique with much promise of discussion, to slander the messenger, ignore the message, and aggrandize himself as the one true authority on economics.

Later you came back and said that I should re-read "the prof" because he and I were on the same page. Why didn't "the prof" recognize that before he posted a damnation of something you think he agrees with?

More an ego problem than a matter of substance, perhaps?

[K-W]

32. just because you posted one non-one liner

doesnt mean you arent posting alot of one liners.

[swag]

33. Sorry.

Professor Strunk tried to teach me to "omit needless words."

[K-W]

21. Nobody hijacked anything, your the one who made this thread

about professors post. He was just sharing his opinion ON A DISCUSSION BOARD

[JHB]

9. That's the heart of the matter, Prof.

When engineers ignore signs that they're operating outside the assumptions of their equations, their bridges (or whatever) fall down.

Unfortunately, Mr M-S here and his sort will keep ignoring the cracks untill the whole thing falls -- not good news, considering that we're all standing on that "bridge".

[swag]

10. Haven't read much Roach, eh?

[JHB]

13. No I haven't. If you want to expound as to where I was wrong...

...please proceed. But no one-liners please.

[ProfessorGAC]

15. It's Hopeless I Fear

The Professor

[swag]

17. Hullo

See post above as of 5:26 PM pacific.

[ferg]

30. Roach

Has been worrying about the imbalances for ages. He is not a fan of Greenspan or of Bush's fiscal disaster.

His main concern is that America is borrowing far too much (government and consumer), and that the world is far too dependent on America's borrow-and-spend growth, particularly that the current account deficit is far too high and needs to be fixed soon.

He's made headlines by stating that "economic armageddon" is possible if those imbalances aren't fixed.

And he's been worrying about this for years.

Unfortunately, Mr M-S here and his sort will keep ignoring the cracks untill the whole thing falls -- not good news, considering that we're all standing on that "bridge".

In other words, the above statement is utterly boneheaded.

Roach has been warning about the cracks, very publically, for years.

[Yavin4]

8. IOW, Businesses Are Hiring Free Laborers

If you're hiring at wages below the real rate of inflation, then you're basically hiring free employees.

[sandnsea]

19. Unlike anything ever experienced???

JFC, does no one remember the 80's? GDP based on military spending due to deficits?? Trickle-down? Down-sizing? Phony stock market based on junk bonds? 10% unemployment by 1992?

Who the hell are these people??

[kodi]

24. investor recovery yes, worker recovery, not on your life.

welcome to the ownership society, where the bank owns everything.

[K-W]

26. I dont think investors have anything to recover from.

They are, after all, investors.

[swag]

28. Exactly

Except I would call it the "own your shit" society, because their shit is all most folks own.

"Ownership society," was simply another of Bush's mispronunciations.

[taught_me_patience]

29. Not exactly true... Executives got nice pay raises this year

From the Wall St Journal:

"Bonuses for many chief executives surged last year, according to a survey by Mercer Human Resource Consulting in New York. A look at the findings:

46.4 percent: Average bonus increase from 2003 at 100 major U.S. corporations, to $1.14 million."


rich keep getting richer under *'s economy

taught

[swag]

31. True, but the stats average down

for us chumps nearer the bottom.