Sign up today and take advantage of member-only content — the kind of timely, cutting edge industry insight that only Money Management Executive can deliver.
  • Exclusive Online Only Content
  • Free Daily Email News Alerts
  • Asset Management Blogs

United States Facing 'Recession of Confidence'

MIAMI-The Great Recession ended 32 months ago. But fear about the sturdiness of its recovery persists.

To wit, real domestic growth reached 3.0% in 2010. Decent for a comeback from a painful recession that began in December 2007 and lasted through June 2009, said economic futurist Jeff Thredgold at NICSA's 30th Annual Conference and Expo.

In 2011, the growth rate fell, to 1.7%. Plus, that came only after a big surge in the second half of the year, the president of Thredgold Economic Associates noted.

Americans are still trying to recover from losing, in many cases, half of their financial assets in the wake of the credit crisis of 2008. And the continuing high rate of unemployment dampens enthusiasm dramatically.

The economy "has been growing statistically, if not emotionally," Thredgold said. "We've had a recession of confidence over the past two and a half years."

Take the high rate of unemployment, which historically speaking should cost President Barack Obama his job, he said.

No incumbent president has survived re-election when the nation's unemployment rate is 7.2% or higher, he said.

The average unemployment rate of the last three years has been 9.0%. That may be down to 8.3%, he said.

But that does not reflect the 4 million individuals who have given up looking for work.

Three years ago, 66% of the adult population was either working or looking for work. Now, that is down to 63%.

If that 3% was added back, the unemployment rate would be 11.3%.

There are bright spots for the emotionally worn out though:

* The American worker is far more productive than Chinese counterparts. The Chinese economy generates $5.5 trillion worth of goods and services, with 1.3 billion people. The U.S. economy generates $15.3 trillion worth, with 310 million people. Each is 12 times more productive, on average, than a Chinese counterpart.

* The U.S. economy has moved from producing modest goods at high prices, to highly competitive and dynamic production of tangible and digital goods and services. It is a leader in pushing competitive economies ahead.

* The U.S. has a "major position" in each of the "seven critical industries of the future." These are technology, transportation, telecommunications, financial services, energy, entertainment and biomedicine.

* The advancing age of 78 million Baby Boomers guarantees growth in three key industries, all of which play to U.S. strengths: health care, financial planning and leisure and entertainment.


Even so, the United States and other Western economies continue to face headwinds, particularly in the near term.

Europe's sovereign debt crisis is not over. Nor is its banking crisis, for a continent where banks supply the great majority of capital for governments and corporations.

Yet that's not the biggest headwind facing Western economies, contends William Lee, managing director of Citigroup Investment Research & Analysis.

The biggest headwind: "Persistent current account deficits,'' Lee said. Translate: Trade deficits.

The combination of sovereign debt, banking and trade problems are serious. "These forces are tearing apart the foundation of the Euro area," Lee said.

The trade account deficits, in particular, show "deepseated structural problems" and come as the center of gravity in world trade is moving from trading corridors in the West to trading corridors in the East.

The United States' trade balance is an indicator. The U.S. Census Bureau and the U.S. Bureau of Economic Analysis reported total exports of $178.8 billion and imports of $227.6 billion in December.

That resulted in a goods and services deficit of $48.8 billion, up from $47.1 billion in November. The goods deficit increased $1.8 billion from November to $64.3 billion, even with slight gains in automotive related exports, for instance.

That's just a short-term snapshot. Deficits persist - and come as trading patterns shift.

The biggest single trading corridor right now is Western Europe to Western Europe, Lee noted. That accounts for 25% of global trade.

But by 2030 its share will be down to 9% and by 2050 to 6%.

Taking its place will be trade inside Asia, between Asian trading partners. That will account for 28% of global trade.

There will be some flows from Asia to Western Europe. But the biggest beneficiary will not be Western countries. The biggest beneficiary will be Australia.


The S&P 500 has essentially been flat for ten years, staring at 1,147.39 at the outset of 2002 and reaching 1,348.08 today.

Nervous investors pulled $125 billion out of mutual funds that invest long-term in U.S. stocks last year. And they poured more than that into bond funds, the current 'friend' of investors.

But "the bond market is now a higher risk sector,'' said Michael J. Niedermeyer, Chief Executive Officer, Asset Management Group and Executive Vice President of the Management Committee at Wells Fargo & Company.

Interest rates can't go lower. Federal Reserve Board Chairman Ben Bernanke said he will keep rates suppressed through 2014.

Which leads Michael W. Roberge, President and Chief Investment Officer at MFS Investment Management to expect a bear market in bonds and fixed-income instruments, after roughly a 26-year run.

"Investors are combating the last crisis,'' said Roberge. They are "paying way too much for safety,'' he said. Ten-year Treasury notes, for instance, have hovered around 2%, over the past year.

They will miss the equity rally of the next 10 years. "Equities will soundly outperform bonds,'' Roberge said.

Interest rates have to increase, he said, and rising interest rates will, in effect, be the next black swan that could catch the investment industry by surprise.

Institutions and individuals could be "really underweighted in equities,'' he said. And a "reversion to mean" in turn means stocks, now battered, will almost inevitably rise over the next decade.

Roberge said most investment managers are, so far, missing this inflection point. They have put $1 trillion into bond funds, worldwide, he noted. But nothing into equity funds.

His firm, MFS Investments, has begun moving clients back into equity funds.