| 来源类型 | Report |
| 规范类型 | 报告 |
| The Case for More Pessimism | |
| John H. Makin; Stephen L. S. Smith; Bruce G. Webb | |
| 发表日期 | 1998-04-01 |
| 出版年 | 1998 |
| 语种 | 英语 |
| 摘要 | Early in 1998, the U.S. and Japanese economies apparently are behaving much as they did in 1997. But 1998 is a more ominous year. The U.S. economy is putting on its annual first-quarter growth spurt, with large increases in employment and retail sales; the inflation news continues to be positive. But the Japanese government is engaged in its annual wheeze to push up the stock market and the currency so that on March 31, Japan’s fiscal year-end, its banking system can pretend–at least for a day–that it is not insolvent. Indeed, the Japanese stock market, at about 17,000, is up more than 13 percent from the start of this year, a greater gain than for the U.S. stock market. Japan’s market is benefiting from a start at 15,000, well below the 18,000 of last January. Meanwhile, the U.S. equity market has risen 10 percent after a hefty improvement of more than 30 percent during 1997. The Approach of Impact A close comparison of the U.S. economy and its prospects today with the situation a year ago is in order because, although the acute financial phase of the crisis in Asia is over for now, the more important real economic impacts are yet to come. Those negative effects on the U.S. economy and the Japanese economy should hit during the first half of 1998. The problem is that the U.S. stock market has already priced the idea that Asia’s slowdown will be temporary, while the Japanese stock market reflects no more than government purchases of stocks, designed explicitly to dress up the balance sheets of Japanese banks. Probably sometime before July, the Federal Reserve will face a U.S. growth rate at or below 1 percent, just as the real economic effects of the excess capacity problems in Asia begin to show up in U.S. data. Based on the “opposing forces” view of the U.S. economy presented by Fed Chairman Alan Greenspan in his February Humphrey-Hawkins testimony to Congress, the lower U.S. growth numbers will imply that the Fed ought to ease to offset a negative impact from Asia. By that time, U.S. earnings growth will have braked sharply, and the Fed will be in the uncomfortable position of having to decide whether it is willing to ease to shore up an overpriced stock market. But make no mistake: the Federal Reserve will be forced to ease because of the real economic situation emanating from Asia. Continued U.S. growth is the only hope for weakening economies in East Asia and Southeast Asia, especially in view of Japan’s plunging economy, which will offer no help to–and perhaps even create an additional drag on–East Asian and Southeast Asian economies. China is particularly vulnerable. Growth is decelerating rapidly, while the deflation endemic to Asia is seeping in. As of February, China’s deflation rate, measured by retail prices, is minus 1.9 percent on a year-over-year basis. This is even lower than Japan’s deflation rate, measured by the deflator for its gross domestic product, at minus 1.3 percent as of the fourth quarter of 1997. Meanwhile, Japan’s deflation is gathering momentum. With Japan and China both experiencing accelerating deflation, the global economy cannot withstand a slippage of U.S. growth to below 1 percent. Talk of a sharply slowing U.S. economy flies in the face of the robust numbers that have been released so far in 1998. February’s report on payroll employment showed 310,000 new jobs in February, taking the three-month average increase in employment to 346,000. Meanwhile, hours worked in January-February rose at a 6 percent annual rate. Hours and employment numbers suggest that first-quarter growth of output could well exceed 4 percent or could even reach 5 percent. A Needed Comparison A closer look at the details of the report and a comparison with strong data at this time last year are needed. During January and February, hours worked in construction were up, at an annual rate above 30 percent, while hours worked in goods industries were up only 2 percent. Clearly, outdoor industries got a huge boost from seasonal factors during January and February. The first month with average weather or worse will show a sharp drop in hours worked (seasonally adjusted). Because, by definition, the seasonal factors must add up to zero, we may see some shockingly negative numbers as we move toward the second quarter. That the winter burst in the payroll employment numbers is an annual event is suggested by the year-over-year growth rates of employment. For January and February, year-over-year employment growth was 2.8 percent, slightly above the 2.5 percent late in 1997 and well below the annualized growth rate of 3.4 percent for those two months ending in February 1998. Employment growth of 2.8 percent is consistent with output growth around 3 percent, but employment is a lagging indicator that follows growth down rather than portending growth. The February employment report also showed an increase in the growth rate of hourly earnings, to a 4.1 percent year-over-year rate. This is close to an expansion high and has put the Fed on watch for fear that wage pressures will translate into higher prices of goods and services. There is no evidence of faster inflation either in the goods sector or in the services sector. Based on the latest February report, producer prices are falling at a year-over-year 1.7 percent rate, while core inflation, excluding falling food and energy prices, is still virtually zero. Producer price changes will probably become more negative, since intermediate and crude goods prices are falling rapidly (even excluding food and energy). Core intermediate inflation is running at a minus 1.2 percent over the past three months, while primary core goods prices are falling at an annual rate of 13.2 percent over the three months ending in February. The broader consumer price index has also continued to perform better than expected. Consumer price data through January showed that the annualized three-month deflation rate for goods was 1.1 percent, down from a virtually flat year-over-year inflation rate. Meanwhile, inflation in the services sector has fallen from a 2.7 percent annual rate to a 2 percent annual rate in the three months ended in January. In short, the United States has been experiencing deflation in goods and disinflation in services in early 1998. The sharp slowdown in inflation has produced a kind of tightening of Fed policy measured by the real Fed funds rate. The real Fed funds rate–calculated by the 5.5 percent market funds rate less year-over-year 1.6 percent CPI inflation–has reached nearly 4 percent. During the much-touted, long expansion of the 1960s, approaching seven years after the trough–as we are for this expansion–the real Fed funds rate was about 1.5 percent. Gauged by the policy instrument most directly under its control, real short-term interest rates, the Federal Reserve is quite tight. Measured by another criterion, the rate of growth of the money supply, the Fed appears to be easing. The growth of M2 (currency plus bank deposits) has risen from a 6.5 percent year-over-year rate to an annualized growth rate of 8.7 percent over the past three months. Meanwhile, growth of a broader money aggregate M3 has risen to 10.2 percent at an annual rate over the past three months, up from a 9.1 percent annual rate. This moderate acceleration of money growth in the United States is more a symptom of past U.S. growth than a harbinger of future U.S. growth. Extensive statistical tests addressing the question of whether money causes real growth or whether real growth brings money growth suggest that rapid money growth is more likely to result from economic growth, rather than the other way around. In short, the acceleration of money growth in the United States during the past several months reflects persistent high growth rates in the United States rather than foretells future high growth rates. Further, the concentration of part of the U.S. economic strength in the housing sector over the past year may have contributed to the strengthening of money growth. Since the broader money aggregates include bank money and since banks tend to be more affected by rapid growth in the housing sector than, say, in the manufacturing sector, the increase in U.S. money growth may mirror a change in the composition of U.S. growth. The manufacturing sector is somewhat more independent of the banking sector, since much of the increased activity in manufacturing is financed either by internal cash flow or by the issue of securities rather than by borrowing from banks. A rapid acceleration in retail sales growth is contributing to the strong U.S. growth scenario in early 1998. February retail sales were reported at +0.5 percent, while January retail sales were revised from a weak 0.1 percent increase to a full percentage point increase. This revision put the annualized growth rate of retail sales during the three months ending in February at 8.1 percent. Estimates of first-quarter consumption growth, which accounts for about two-thirds of GDP growth, were revised upward to about 5 percent, based on the strong performance of retail sales during January and February. But, once again, strong retail sales early in the year are an annual event and therefore do not suggest a sustained trend. This can be seen from looking at year-over-year retail sales instead of month-to-month or quarter-to-quarter rates. The year-over-year retail sales growth rate for February was 2.5 percent, even though February 1998 experienced more favorable weather than February 1997. The implication is that hearty February seasonals and warm weather have produced a January-February surge of retail sales. Our retail sales model forecasts only 0.1 percent growth of retail sales for March, which would still leave first-quarter annualized retail sales growth at about 6.6 percent. This would imply consumption growth above 4 percent, which could contribute 3.2 percentage points to first-quarter growth. The Outlook for U.S. Growth Even first quarter growth, however, may be weaker than currently anticipated. Just as the faulty seasonal adjustment factors make employment and consumption growth look unusually potent during the first quarter, they also tend to subtract from the contribution of net exports. During the past two years, net exports subtracted an average of 1.3 percentage points from growth even without the negative impact flowing from Asia. In adding up all the factors contributing to growth, we may see a first-quarter growth number for final sales of goods and services at or below 2 percent. Granted that consumption can contribute about 3.2 percentage points to first-quarter growth, we need to consider the impact of net exports, investment, and government spending. Taking the average of the past two years’ negative contribution from net exports of minus 1.3 percentage points of growth would take us down to a 1.9 percent growth rate for the first quarter. Government spending is likely to contribute its usual zero percentage points to growth. The critical indicator for the first quarter is investment spending. Total investment spending includes business fixed investment, residential investment, and inventory investment. Inventory investment is a residual category that accounts for the difference between output and demand growth. If output grows faster than demand growth (referred to as final sales growth), then inventories rise, as they reflect an accumulation of unsold goods and suggest slower growth in the next quarter. Business fixed investment fell at a 3.6 percent annual rate during the fourth quarter of 1997. Most analysts had expected a positive growth rate close to 8 percent. The drop in business fixed investment during the fourth quarter made sense, because U.S. managers should be more cautious about adding to capacity until they determine the impact of real economic effects flowing from the Asian slowdown. Residential investment rose at a 9.8 percent annual rate during the fourth quarter, a reflection of the well-known strengths in the housing sector. Meanwhile, inventory investment contributed 1.4 percentage points to GDP growth during the fourth quarter, making up for the difference between the growth of final sales, or demand growth, at 2.5 percent and output growth at 3.9 percent. If business investment and residential investment make a zero net contribution to GDP growth during the first quarter, then final sales growth will slip to the 1.9 percentage point annual rate suggested by subtracting the impact of net exports from the contribution of consumption growth. If output growth approaches 4 percent as suggested by the strong employment numbers during January and February, inventory accumulation will have contributed more than 2 percentage points of this. If inventory accumulation contributes more than half of U.S. growth during the first quarter of 1998 after a substantial inventory buildup during the fourth quarter of 1997, we will have a strong indication that the real effects of the Asian slowdown are beginning to be felt. Spurred on by strong signals from the domestic economy, U.S. producers will have increased output too much, while not allowing enough for the letup in demand growth from the rest of the world and its negative implications for investment growth. An inventory accumulation equal to 2 percentage points of quarterly growth will require a drastic arrest in production during the second quarter. This would be reflected in much weaker employment numbers, which is consistent with employment figures tending to be a lagging indicator. Slower employment growth means that an economic slowdown has already begun. Estimating the growth of final sales during the second quarter might give some idea of how employment growth might need to slacken to avoid further inventory building. Consumption growth in 1997 slowed sharply from the first to the second quarter and contributed only 0.6 percentage points to growth in the second quarter. The big contribution came from an intense acceleration in investment spending, with business fixed investment reaching an annual rate of growth of nearly 20 percent in the second and third quarters. Suppose this year that, given the momentum in personal income and follow-through spending in the housing sector, consumption growth can contribute 2 percentage points to growth during the second quarter. Net exports will probably contribute negative 1-1.5 percentage points to growth as the pernicious impact of the Asian crisis becomes more pronounced. Government spending will likely continue a zero net impact on demand growth. Assume again that investment spending, exclusive of inventory investment, will be growing at a zero rate–although by the second quarter, if the need to retard capacity accumulation continues, the number may be weaker. Taking these parts together–with consumption growth contributing 2 percentage points to growth, the government sector contributing zero, investment (excluding inventories) contributing zero, and net exports contributing minus 1-1.5 percentage points–a final sales or demand growth number below 1 percentage point is entirely possible during the second quarter. Unless employment growth brakes noticeably, say, to a level consistent with 2 percent output growth–well below 200,000 jobs per month–the second-quarter inventory buildup could be even larger than the first and could further rein in the third quarter. The Impact of a U.S. Slowdown Taken by itself, the slowdown in U.S. growth that could emerge during the first half of 1998 would be no more than a refreshing pause for the robust U.S. economy. U.S. growth last dipped below 1 percent (to 0.9 percent) in the first quarter of 1995. Since then, growth has averaged well above 3 percent, with only one other slowdown to a 1 percent growth rate during the third quarter of 1996. That weak quarter was precipitated by weak consumption growth and a large negative 1.5 percentage point contribution from net exports. The problems that emerge from a U.S. growth slowdown during the first half of 1998 are tied to the U.S. stock market and to Japan and Asia. Estimates of earnings growth for the Standard & Poor’s 500 companies for the first quarter in the United States began the year at about 12 percent. Since then, estimates of earnings growth have been revised down to below 4 percent for S&P 500 companies in that period. Meanwhile, the stock market has risen by 10 percent since the beginning of the year. Analysts expect a reversal of the growth slowdown in earnings later in the year. The expectation is strengthened because, in driving equity prices up another 10 percent, investors have already paid for an expected improvement in earnings growth. While wage growth holds around 4 percent, a period of falling growth and rising inventory accumulation will cause earnings growth to continue to lag into the second and third quarters of this year. This trend may well put downward pressure on equity prices, which in turn could cause some deterioration in consumer confidence and a setback in consumption growth. Such a pessimistic cumulative picture of a slowdown has been heard before during this robust U.S. expansion with its even more vigorous equity market. What seems disconcerting now is the ease with which a waning of U.S. growth and an accompanying shrinkage of earnings could occur, based on a normal transmission of the negative effects from the Asian crisis. This outlook becomes truly alarming when considering the rapidly deteriorating Japanese economy, which, after all, is the major one in Asia, with output worth more than fifteen times that from South Korea. Japan’s Continuing Crisis As we entered 1998, Japan was slipping into another deflationary slide. The performance of the Japanese economy during the fourth quarter of 1997–according to data just released–was bad enough, but the first quarter of 1998 will be even worse. The Japanese economy contracted at “only” a negative rate of 0.7 percent during the fourth quarter of 1997. Even this miserable growth rate assumed that net exports contributed 2.3 percentage points to Japanese growth, while domestic demand fell at a 3 percent annual rate, for a net impact of minus 0.7 percent. For a country like Japan, a 2.3 percentage point contribution to growth from net exports is not likely to persist. The biggest factor in Japan’s real growth rate during 1997 was a deflation rate of 1.3 percent. The money value of goods and services produced in Japan fell by 2 percent during the fourth quarter of 1997, even as its money supply growth accelerated rapidly. Japan’s negative growth and deflation seem ready to accelerate in 1998. This is particularly disconcerting in view of the failed effort to jump-start the economy with a one-shot tax rebate during February. Prime Minister Ryutaro Hashimoto’s tax cut of 2 trillion yen, announced in December, took the form of a full rebate of taxes for Japanese households during February, adding about $300 per household in one month. Based on available data, including February auto sales and preliminary reports on February retail sales, the funds were not spent but were added to savings. Meanwhile, the Japanese government seems fixated on the notion that pushing the stock market to 18,000 by the end of March, thereby avoiding a balance sheet disaster for the banking system, will somehow mean the achievement of a meaningful policy goal. Nothing could be further from the truth. Japan desperately needs to stimulate its economy, but unfortunately it is getting bad advice from the United States on how to do so. The persistent call by the United States for tax cuts or spending increases in Japan has wasted precious time in attempting to push Japan’s policymakers to use the wrong policy instrument. The approach of fiscal stimulus simply will not work: Japan’s fiscal picture is so glum that the Hashimoto government is forced to improve it. Pushing now for large tax cuts from Japan is, in effect, asking the Hashimoto government to resign. Japan’s gross debt-to-GDP ratio is nearly 100 percent, while its comprehensive deficit is well over 6 percent of GDP. Those statistics are by far the worst in the G-7. Treasury Secretary Robert Rubin, who repeatedly calls for tax cuts in Japan, might reflect on how he would respond to such requests if the U.S. budget deficit were more than 6 percent of GDP and America’s debt-to-GDP ratio were more than double its current level. His praise for America’s move toward a balanced budget leaves little doubt that he would strongly resist any worsening of a fiscal picture as bad as Japan’s. Beyond this, we know that past fiscal stimulus packages for Japan have had only a temporary positive effect. The problem is more acute today because it is impossible to convince households to spend tax cuts when those cuts cannot be made permanent in any credible way. With its huge and growing debt and deficit, the Japanese government cannot effect plausible tax cuts because households will save them in anticipation of higher taxes that will be needed to remedy Japan’s continuing fiscal problems. The failure of Hashimoto’s December tax cut to increase expenditure underscores this problem. Faced with the deflationary problems of Asia and the inability to use stimulative fiscal policy, Japan’s only remaining option is aggressive and even faster printing of money. Though Japan’s money supply has expanded at an astounding rate–with February’s addition seven times the average monthly increase in 1997–it is still not enough. The Bank of Japan must go further and convince consumers that prices will be higher next year. This endeavor will require massive reflationary efforts along with a clear statement from the Japanese government that higher prices are an objective of monetary policy. Beyond Japan Sadly, such a radical policy move is unlikely in Japan, where policymakers continue to content themselves with treating the symptoms rather than the causes of Japan’s serious downturn. The consequences of Japan’s drift into deflation are negative indeed for the rest of Asia. Already China’s growth rate is halting rapidly, with deflation beginning to emerge. The Chinese, trying desperately to offset the problem, recently declared a 5 percentage point reduction in required reserves for Chinese banks. The reduction, however, was simply absorbed by a large bond issued by the government with the nominal purpose of recapitalizing the banking system. There will be little real effect on China’s banking system. The performance of the U.S. economy and its stock market has led some analysts to conclude that the Asian crisis–or at least its impact on the U.S. economy–is over. Indeed, most observers have emphasized the benign impact of the Asian crisis as a fortuitously timed cap on U.S. inflation pressures that will keep the Fed on hold for an even longer time and thereby somehow cushion entirely the effect of acutely lower earnings growth. But this “happy coincidence” view of the Asian crisis generally ignores the weight of Japan in the global economy and the serious deterioration of economic conditions in Japan that reinforces and is reinforced by the broader Asian setback. Not only did the Japanese economy look terrible in the fourth quarter, it will look even worse in the first quarter of 1998 and onward. At this time of year, Japanese companies, regardless of the outcome, are usually forecasting investment growth of 7-8 percent. The latest survey by Japan’s Nikkei newspaper, however, shows that companies are planning to cut investment spending by 4.6 percent this year: that estimate dropped from an expected 3.3 percent decline just several weeks ago. The U.S. economy and European economies, for that matter, will probably experience slowing growth as we move further into 1998. The “benign” disinflationary impact from the crisis in Asia and Japan will be far more problematic in a period of decelerating growth than in the period of accelerating growth during the second half of 1997. John H. Makin is a resident scholar at AEI. |
| 主题 | Asia |
| 标签 | Economic outlook ; John Makin Economic Outlook |
| URL | https://www.aei.org/research-products/report/the-case-for-more-pessimism/ |
| 来源智库 | American Enterprise Institute (United States) |
| 资源类型 | 智库出版物 |
| 条目标识符 | http://119.78.100.153/handle/2XGU8XDN/204567 |
| 推荐引用方式 GB/T 7714 | John H. Makin,Stephen L. S. Smith,Bruce G. Webb. The Case for More Pessimism. 1998. |
| 条目包含的文件 | 条目无相关文件。 | |||||
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