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America’s recovery a 'false dawn,' says Stephen Roach
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America’s recovery a 'false dawn,' says Stephen Roach

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America’s recovery a 'false dawn,' says Stephen Roach

Stephen Roach, former chairman of Morgan Stanley Asia

Despite signs that the U.S. economy is gaining traction, Stephen Roach, former chairman of Morgan Stanley Asia, says the recovery appears to be a "false dawn."

"Financial markets and the so-called Davos consensus are in broad agreement that something close to a classic cyclical revival may finally be at hand for the U.S. But is it?" Roach, a senior fellow at Yale University, wrote in an op-ed published on the Project Syndicate website on Monday.

"At first blush, the celebration seems warranted… But my advice is to keep the champagne on ice," he said.

Roach argues that two quarters of strengthening gross domestic product (GDP) growth doesn't indicate a breakout from an anemic recovery. He cited a temporary acceleration in the second and third quarters of 2010 as well as in the fourth quarter of 2011 and the first quarter of 2012.

Roach says he would not rule out a similar outcome this time around, given much of the growth uptick has been driven be an "unsustainable" surge of restocking. Over the first three quarters of 2013, rising inventory investment accounted for 38 percent of the 2.6 percent increase in total GDP, he said.

"With inventory investment unlikely to keep accelerating at anything close to its recent rate, overall GDP growth can be expected to converge on this more subdued pace of final demand," he said.

According to Roach, the toughest issue for the economy is the ongoing household "balance sheet recession" that is stifling American consumers who are still working to pay down debt and remain in saving mode.

The debt-to-income ratio – or the percentage of a consumer's monthly gross income that goes toward paying debts - for U.S. households is now down to 109 percent, well below the peak of 135 percent reached in late 2007.

In the 17 quarters since the "recovery" began, annualized growth in real personal consumption expenditure has averaged just 2.2 percent, compared with a pre-crisis trend of 3.6 percent from 1996 to 2007, he said.

Has US economy turned a corner? Where do we stand?
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"In the past, when discretionary spending on items such as motor vehicles, furniture, appliances, and travel was deferred, a surge of 'pent-up demand' quickly followed," he said

"The record plunge in consumer demand during the Great Recession has been followed by persistently subpar consumption growth," he added, referring to the 2007-2008 global financial crisis.

Finally, Roach says the decline in the unemployment rate is merely a reflection of grim labor market conditions which have discouraged workers from staying in the workforce.

If the labor force participation rate was 66 percent, as it was in early 2008, rather than 62.8 percent, as it was in December 2013, the unemployment rate would be just over 11 percent, not 6.7 percent, he said.

"Yes, there has been some progress on the road to recovery. But, as (economists) Carmen Reinhart and Ken Rogoff have long documented, post-crisis healing is typically slow and painful. Notwithstanding the Fed's [Federal Reserve] claims that its unconventional policies have been the elixir of economic renewal in the U.S., the healing process still has years to go," he concluded.

America?s recovery a 'false dawn,' says Stephen Roach

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