The U.S. economic recovery this time around is “darn difficult and confounding,” said Todd Buchholz, speaking to a roomful of CFOs in San Francisco Monday. By that he meant it defies the thinking about economic cycles that had worked for decades and had driven government and central bank policies.
And as if to underscore his point, new U.S. manufacturing data released Monday showed the economic recovery hitting another speed bump: production falling and new orders declining among industrial companies. The lag sent the Institute for Supply Management’s index to below 50, which indicates a contracting economy. Why won’t this recovery “behave”?
At CFO’s Playbook West conference, Buchholz, a former economic policy adviser to George H.W. Bush, explained why, despite pockets of growth in the economy, business and consumer confidence just aren’t displaying much resilience. That missing piece of the economic recovery is a result of what Buchholz calls “the age of anxiety.” He sees powerful forces that make the world more efficient and have raised the overall standard of living globally, but “cause your neighbors and customers to sit at the kitchen table at night biting their fingernails and wondering how they are going to make ends meet.”
The most important force: a tremendous increase in competition in the labor markets, which Buchholz attributed to the collapse of the Berlin Wall and the opening of markets in China and India. “For every square foot of Berlin Wall cement that crumbled to the ground [in 1989], hundreds and hundreds of workers that had been trapped behind the wall under communism were suddenly free,” said Buchholz. “Free to vote, free to travel and free to compete against someone writing software in Silicon Valley or selling textiles in North Carolina.”
The development of the labor force in emerging markets as well is pushing down labor rates, hurting confidence among lower income and middle class households in the U.S. and Europe, Buchholz said. At the same time, a rise in the global population is pushing up commodity prices.
But two things have kept the U.S. economy afloat and allowed at least a partial recovery to take hold: Federal Reserve monetary policy, which has driven down interest rates across the yield curve, and the weak U.S. dollar. “[Ben] Bernanke has been pilloried but it’s the principal reason why the U.S. economy has had a plus sign next to it since July 2009,” Buchholz said. In addition, “the healthiest parts of the economy are autos and housing, which obviously are closely related to interest-rate policy,” he said.
At the same, a weak U.S. dollar has been good for U.S. exporters, including big names such as John Deere, Caterpillar and Boeing. And yes, the U.S. dollar is still weak, even with all that has happened with the euro zone crisis, Buchholz pointed out, noting that the euro is still 10% stronger against the dollar than when it was created and set at a market level that was designed to give neither Germany nor the U.S. a competitive advantage.
While the Fed is in danger of overshooting with monetary policy, Buchholz doesn’t see any chance of stagflation, which is what some of Bernanke’s critics are suggesting. Nineteen-seventies style “stagflation” is a recession that doesn’t end combined with raging inflation.
“Stagflation” is always followed by the phrase “wage price spiral,” Buchholz said. “We are not going to get the ‘flation’ part of stagflation.”
But the U.S. economy is also not likely to enter a period of robust growth anytime soon, and again, the labor markets are a big part of that. “The job market is terrible,” Buchholz said. “You and other corporate executives took a meat axe to the job market, and jobs are not coming back very fast.”
Companies are asking employees to work overtime and hiring temporary help to fill gaps, but neither of those things are leading to the creation of full-time jobs. And that’s a key reason why the U.S. economy will continue its recovery at a glacial pace, said Buchholz.
“Will consumers buy enough homes, cars and Greek yogurt to keep the economy going?” asked Buchholz. “Yes — just.”
In the meantime, for CFOs and their companies, the result is extremely competitive markets. The challenge is to avoid what Buchholz calls “commodity hell,” which is to have a product or service that the company cannot say is better, faster or more reliable than its competitor’s. “If all you can say is, ‘Yes, we have them too,’ then you are in commodity hell,” Buchholz said.