Economist: People Less Willing To Spend Now


"Recovery, yes. But it sure doesn't feel like it" was the theme of the first panel of the first-ever New York NADA, IHS/Global Insight Automotive Forum launched with a 30,000-foot view of the global and U.S. economies.

Nariman Behravesh, chief economist at IHS, said the economy is a mixed bag. The recession is over, but growth will be lackluster this year, with a 3.5% to 4% growth rate next year. "The basic message at the global level is, we are at multi-speed level. The U.S. is in the middle lane, Europe is growing at half the speed, and Asia is growing at twice the speed of the U.S."

He said the really good news for the U.S. economy is the business side, with corporate profits now strong. "The ratio of cash flow to GDP is the highest on record. That means corporations are sitting on a mountain of cash, which is good news in the sense that they are in very good financial shape."



Behravesh says the dilemma is that companies are not spending on jobs. Also, exports are rebounding strongly, he said, which is getting budget and trade deficit down. "One reason is, the dollar has come down a lot, because of weakness in Europe. "The dollar is the best-looking horse in the glue factory," he said.

While the official numbers on fourth-quarter growth reflected a positive 5.6% growth, Behravesh said that would not be a good measure of underlying growth. "It was based on reduction in inventory liquidation, and cash incentives like Cash for Clunkers. Real growth was 2.5% to 3%. That's not a great recovery, it's more of a blah-type recovery."

He said IHS predicts first-quarter growth will actually be the best in about three years. "Two areas of strong growth: capital spending on equipment, like computers and machinery, and exports. Those are the engines of growth. The drags will come from capital spending on structures like non-residential construction, with commercial real estate a big problem in the next couple of years."

Also a problem, he notes, is state and local spending. And housing. "When you put it together, we have blah recovery that will pick up momentum with 3.5% to 4% recovery next year."

Then there's the elephant: Health care. IHS predicts Medicare/Medicaid could go up to 20% of GDP in coming years. "This is a ticking time bomb," said Behravesh. So, did the new health-care bill deal with that? Only partly, he argued.

"There are two problems. In the U.S., [the new law] has dealt with part. They have dealt partly with coverage but they have shied away from dealing with cost. It needs to be managed and it isn't. We have the most expensive healthcare system in the world and that cost is rising at a rapid rate. Did we fix that? No. If anything, we made it worse."

On the positive side: Interest rates are low; inflation is low; stock prices have rallied; and lower energy prices are positives.

"There's real income growth. However, it's not so much the ability to buy as a willingness that's a major obstacle. Gasoline sales as a share of take-home pay are below 3%, and that gives households a little more room to maneuver. The negatives are unemployment, tight credit and high debt burdens," Behravesh says. "The 'new normal' is that households will be saving more, and households will be on a much better financial footing."

Bottom line, he says, we are in a recovery, albeit a lackluster one. The good news: it will pick up momentum as we go forward. "The chances of stronger growth are about 20%. The chances of a double-dip [into recessionary scenario] is also about 20%.


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