Economics is Broken, is the U.S. Economy as Well?

Megan GreeneSenior Fellow, Mossavar-Rahmani Center for

Business and GovernmentHarvard Kennedy School

Overview• US Cyclical Overview (Is the US Economy Broken?)

• Global Cyclical Backdrop

• Structural Quagmires (Economics is Broken)

US Cyclical Overview (Is the US Economy Broken?)

US Retail Sales Holding Up

US Retail Sales (% change, yoy)

Source: US Census Bureau, Bloomberg.

Headline vs. Core

Consumer Confidence Robust

Consumer Confidence

University of Michigan vs. Conference BoardSource: University of Michigan, Conference Board, Bloomberg.

US Housing Market a Bright Spot

Source: Pantheon Macro.

US Housing Market

Manufacturing WeaknessISM Survey

Manufacturing vs. Non-ManufacturingSource: ISM, Bloomberg.

Business Confidence Down

Source: NFIB, Bloomberg.

Business Confidence

NFIB (rhs) vs. CEO confidence (lhs)

CoronavirusJurisdictions with cases confirmed (as of Mar 5, 2020)

Source: Bloomberg.

Coronavirus Impact

Coronavirus Supply Shortages

Supply Problems Demand Problems?Inflation Expectations Have Plunged

Source: Bloomberg.

Financial Conditions Have Spiked

Source: Bloomberg.

Central Banks to the RescueG7 + Australia Policy Stance

Source: Bloomberg.

Fiscal PolicySpend, or Save? In 2001 and 2008, Tax Rebates Were Saved

Source: Bloomberg.

Global Cyclical Backdrop

China Slowdown

Source: Bloomberg.

China Thermal Coal Usage

China Slowdown

Source: Bloomberg.

Chinese Official PMI

SARS Impact on Chinese Retail Sales

Retail Sales, % change (yoy)

Source: Bloomberg.

Chines Authorities Stepping on the GasPBoC Rates

Source: Bloomberg.

Reserve Ratio, Deposit Rate

Japan Contracts

Source: Economic and Social Research Institute, Cabinet Office.

Japan real GDP, % change qoq, annualized

Major EZ economies weakened in Q4

Source: Pantheon Macroeconomics.

EZ Real GDP growth, % change qoq

EZ Industrial Production Falling

-5

-4

-3

-2

-1

0

1

2

3

4

5

Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19

Source: Eurostat.

EZ Industrial Production, % change yoy

PMI Also ContractingEZ Manufacturing PMI

Source: IHS Markit.

German Business Confidence Plunges

Source: ZEW, Bloomberg.

ZEW Indicator of Economic Sentiment

Structural Quagmires (Economics is Broken)

Don’t Be Fooled by the Stock MarketUnited States: S&P 500 and Real GDP Growth Correlation (%)

Source: BEA, Bloomberg, Rosenberg Research.

38%

30%

70%

7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

1950-1959 1970-1989 1990-2009 2010-2019

Trade: Tariffs are “working”US trade deficit with China ($m)

Source: Bloomberg.

Trade: Tariffs are “working”US Exports to China ($m)

Source: Bloomberg.

Trade: Who’s Next?US Bilateral Trade Deficit ($bn)

Source: US Census Bureau.

Debt: So Much For Deleveraging

0

50

100

150

200

250

300

2001 2007 2019

Global Debt Global GDP

Global Debt Outpaced Income 5x This Cycle ($trn)

Source: IIF, IMF, Rosenberg Research.

Debt: Who Will Buy US Treasuries?Holdings of US Treasuries ($bn)

Federal Reserve, China, JapanSource: US Treasury Department, Bloomberg.

- 11/20/13, PBoC: “No longer in China’s favor to boost record FX reserves”

- US Treasury supply skyrocketed

- FX hedging makes foreign ownership of US Treasuries expensive

- All Hail the safe haven!

- So far, no crowding out

Risk of Falling AngelsRoughly Half of US Corporate Bonds are Rated Baa or BBB

Source: Bloomberg.

Low Growth, Low Inflation, Low Rates

Lower For Longer (% change, yoy and 10y yield)

Source: BEA, BLS, Bloomberg.

Inflation Peaks Ever Lower

2.7

6.26.6

1212.4

5.3 5.2

2.92.4

0

2

4

6

8

10

12

14

Oct '59 Dec '69 Dec '70 Jan '80 Jul '80 Nov '82 Mar '91 Sep '06 Aug '19

Inflation Peaks (% change, yoy)

Source: BLS, Rosenberg Research.

Wage Inflation Just As LacklustrePhillips Curve: The Theory vs. Reality

Source: BLS.

Demand Side Problem: Secular StagnationSavings > Investment interest rates pushed down

Source: Policonomics.

Inequality Contributes to Savings Glut

0.38

0.4

0.42

0.44

0.46

0.48

0.5

6.0

8.0

10.0

12.0

14.0

16.0

CBO PSZ AS

Gini Coefficient of Income Inequality Income Share of Top 1%

Source: US Census Bureau. Source: CBO, World Inequality Database, Auten-Splinter Online Appendix.

Supply Side Problem: Weak Productivity

Low Capex, Low Productivity Growth

Source: Pantheon Macro.

Tech Just Isn’t There Yet

Source: The Dogington Post.

Climate Change

Source: Global Carbon Project, Our World in Data, Financial Times.

Who Will Come to the Rescue?

Source: NBER, BEA, Bloomberg, Rosenberg Research.

There Are Solutions- Cyclical Picture Looks “Meh”

- Structural Challenges are Formidable

- BUT there are (FISCAL) policies that address many of these challenges:

- Progressive tax system to help compensate the losers- Productive Public Investment- Education and Skills Retooling- Research & Development- Retool the economy so it is more climate friendly

- The problem is POLITICIANS. The payoff on these policies may not happen within an electoral cycle.

Implications for Retirement Savings- Recession risk in the U.S. has increased in the past month

- Continue to invest defensively—utilities, healthcare, internet, education

- Sequence risk has risen

- The US looks like the cleanest shirt in the laundry basket- China, Japan, Europe and Emerging Markets showing

more weakness than the U.S.

- “Lower for longer” will persist, with growth, inflation and rates remaining muted across the developed world. This generally makes fixed income challenging and is supportive for equities

Thank you!

Megan GreeneSenior Fellow, Mossaver-Rahmani Center for

Business and GovernmentHarvard Kennedy School

@economistmeghttps://www.ft.com/megan-greene