Time to Rebalance a Special Report
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Time to rebalance A special report on America’s economy April 3rd 2010 23/3/10 13:21:01 AmEconSRCOV.indd 1 The Economist April 3rd 2010 A special report on America’s economy 1 Time to rebalance Also in this section The end of the binge The consumer boom deed fundamentals. Now economic rules are reasserting themselves. Page 3 Look after the cents Are Americans naturally spendthrift? Page 4 Export or die With demand at home at rock bottom, American rms are looking abroad. Page 6 Energetic progress There is every chance that in future energy will contribute less to America’s trade decit. Page 8 Somewhere to live Why the sunbelt and urban sprawl are down but not out. Page 9 America’s economy is set to shift away from consumption and debt and towards exports and saving. It will be its biggest transformation in Trying harder decades, says Greg Ip Can higher productivity ll the gap? Page 11 TEVE HILTON remembers months of economy recovers, some of those jobs will Sdespair after the collapse of Lehman come back, but many of them will not, be• Work to be done Brothers in 2008. Customers rushed to the cause this was no ordinary recession. The How the government can helps things along. sales oces of Meritage Homes, the prop• bubbly asset prices, ever easier credit and Page 12 erty rm Mr Hilton runs, not to buy houses cheap oil that fuelled America’s age of con• but to cancel contracts they had already sumerism are not about to return. signed. I thought for a moment the world Instead, America’s economy will un• Not in the bag yet was coming to an end, he recalls. dergo one of its biggest transformations in There are still plenty of things that could go In the following months Mr Hilton decades. This macroeconomic shift from wrong with the recovery. Page 13 stepped up e orts to save his company. He debt and consumption to saving and ex• gave up options to buy thousands of lots ports will bring microeconomic changes that the rm had snapped up across Arizo• too: di erent lifestyles, and di erent jobs na, Florida, Nevada and California during in di erent places. This special report will the boom, taking massive losses. He even• describe that transformation, and explain tually laid o three•quarters of its 2,300 why it will be tricky. employees. He also had its houses com• The crisis and then the recession put an pletely redesigned to cut construction cost abrupt end to the old economic model. De• almost in half: simpler roofs, standardised spite a small rebound recently, house window sizes, fewer options. Gone were prices have fallen by 29% and share prices the 12•foot ceilings, sweeping staircases by a similar amount since their peak. and granite countertops everyone wanted Households’ wealth has shrunk by $12 tril• when money was free. Meritage is now ca• lion, or 18%, since 2007. As a share of dis• Acknowledgments Apart from those mentioned in the text, the author would tering to the only customers able to get posable income it is back to its level in 1995. like to extend special thanks for their help to Menzie credit: rst•time buyers with federally And if consumers feel less rich, they are Chinn, Caroline Freund, Ed Glaeser, Shane Goettle, James guaranteed loans. It is clawing its way back less inclined to spend. Banks are also less Hamilton, Gordon Hanson, Doug Irwin, Larry Katz, Michael Mauboussin, Lesa Mitchell, Richard Rathge, to health as a leaner, humbler company. willing to lend: they have tightened loan Daniel Yergin, Mark Zandi and Ivy Zelman. The same could be said for America. standards, with a push from regulators Virtually every industry has shed jobs in who now wish they had taken a dimmer A list of sources is at the past two years, but those that cater view of exotic mortgages and lax lending Economist.com/specialreports mostly to consumers have su ered most. during the boom. Employment in residential construction Consumer debt rose from an average of An audio interview with the author is at and carmaking is down by almost a third, less than 80% of disposable income 20 Economist.com/audiovideo in retailing and banking by 8%. As the years ago to 129% in 2007. If other crises of 1 2 A special report on America’s economy The Economist April 3rd 2010 2 the past half•century are any guide, Ameri• Abundant domestic shale gas should radi• ca’s consumers will spend the next six or cally reduce America’s gas imports. seven years reducing their debt to more America’s economic geography will manageable levels, reckons the McKinsey change too. Cheap petrol and ample credit Global Institute. This is already changing encouraged millions of Americans to ock the composition of economic activity. to southern states and to distant suburbs Consumer spending and housing rose (exurbs) in search of big houses with lots from 70% of GDP in 1991to 76% in 2005 (see of land. Now the housing bust has tied chart 1). By last year it had fallen back to them to homes they cannot sell. Popula• 73%, still high by international standards. tion growth in the suburbs has slowed. For The e ect on the economy of deated the present the rise of knowledge•inten• assets, tighter credit and costlier energy are sive global industries favours centres rich already apparent. Fewer people are buying in infrastructure and specialised skills. homes, and the ones they buy tend to be Some are traditional urban cores such as smaller and less opulent. In 2008 the medi• New York and some are suburban edge cit• an size of a new home shrank for the rst ies that o er jobs along with a ordable time in 13 years. The number of credit cards houses and short commutes. in circulation has declined by almost a A burst of productivity could lift in• fth. American Express is pulling back tant to withdraw the stimulus for fear of comes and prots. That would enable con• from credit cards and is now telling cus• pushing the economy back into recession. sumers to repay some of their debt yet con• tomers how to use their charge cards Tighter credit and lower consumer bor• tinue to spend. The change in the mix of (which are paid o in full every month) to rowing are not the only drivers of eco• growth should help: productivity in con• control their spending. nomic restructuring. A less noticed but sig• struction remains low, whereas in exports Normally, deep recessions are followed nicant push comes from higher energy the most productive companies often do by strong recoveries as pent•up demand re• prices. A strengthening dollar and ample best. But the hobbled nancial system will asserts itself. In the recent recession GDP supply kept oil cheap for most of the 1990s, make it hard for cash•hungry start•ups to shrank by 3.8%, the worst drop since the feeding America’s addiction to imports. get nancing, so innovation will su er. second world war. In the recovery the That began to change a few years before The outlook for business investment economy might therefore be expected to the crisis as the dollar fell and emerging depends on whether it is for equipment or grow by 6•8% and unemployment to fall markets’ growing appetite put pressure on buildings. Spending on equipment is ex• steadily, as happened after two earlier re• global production capacity. pected to be fairly strong, having largely cessions of comparable depth, in 1973•75 A fourfold increase in oil prices since avoided excess in the boom period, and in• and 1981•82. the 1990s has rearranged both consumer deed in the fourth quarter of 2009 it raced and producer incentives. Sport•utility ve• ahead at an annual rate of 18%. In February No bounce•back hicles are losing popularity, policies to John Chambers, the boss of Cisco Systems, But this particular recession was triggered boost conservation and renewable energy a maker of networking gear, called it one by a nancial crisis that damaged the • have become bolder, and producers have of the most robust, positive turnarounds nancial system’s ability to channel savings found a lot more oil below America’s soil I’ve seen in my career. Demand for new to productive investment and left consum• and coastal seabed. Imports of the stu buildings is far lower: empty shops and of• ers and businesses struggling with surplus have dropped by 10% since 2006 and are ces attest to ample unused capacity. And buildings, equipment and debt accumulat• likely to come down further. When natu• business investment typically accounts for ed in the boom. Recovery after that kind of ral•gas prices followed the rise in oil earlier only 10•12% of GDP, so it will never be a full crisis is often slow and weak, and indeed this decade, exploration companies used substitute for consumer spending. some nine months into the upturn GDP new methods to get at gas trapped in shale has probably grown at an annual rate of formations from Texas to Pennsylvania. The road to salvation less than 4%. Unemployment is well up As consumers rebuild their savings, Amer• throughout the country (see map), though ican rms must increasingly look abroad it declined slightly in February. What goes up may come down 1 for sales. They have a lot of ground to make So if America is to avoid the stagnation % of GDP up.