Global: The Big Squeeze Stephen Roach (New York) Morgan Stanley Global Economic Forum [4/4/05]
A US-centric global economy continues to run on fumes. In the developed world, the current recovery has been notable for a lack of organic income growth -- the wage earnings derived from productive employment. For Europe and Japan, this income shortfall has restrained domestic consumption --forcing these two economies to rely largely on external demand as their only real source of growth. America has been different: Consumption has boomed even in the face of subpar labor income growth. Can this anomaly persist?
The simple answer, in my view, is not for long. America's income-short, consumer-led recovery is the aberration -- not the norm -- in this Brave New World. It is all about ever-declining personal saving rates, ever-widening current account deficits, mounting debt burdens, and increasingly wealth-dependent consumers. It personifies what I believe is one of the most precarious macro models that has ever existed for a major economic power. It is a model that not only puts pressure on future prospects in the US but also underscores the tensions bearing down on the rest of the world. In my view, income-short growth models are not sustainable -- the only question pertains to the circumstances of their demise.
Strong words, I realize that. But consider the facts: Lagging employment and real wage growth has been a hallmark of the first half of the 2000s in the developed world. Unemployment in Europe and Japan is hovering near-post-World War II highs. The US is in the midst of the weakest period of job creation in modern history -- its unemployment rate has been depressed by those fleeing the work force. Jobless recoveries have become the norms in most major segments of the developed world. And they persist to this very day.
A similar pattern is evident in the other driver of labor income generation -- worker pay rates. According to the OECD, compensation per hour in the Euro area expanded at an anemic 2.3% average annual rate over the 2001-04 period; for Japan, hourly compensation actually declined by 1.2%, on average, over this same time frame; even in the US, growth in hourly worker pay averaged only 3.3% over the past four years. For Europe and Japan, these trends work out to virtually no growth in inflation-adjusted, or real terms. With inflation (i.e., the private consumption deflator) averaging 2.1% in the Euro area over the 2001-04 period, that translates into only 0.2% growth in real compensation per hour over this period. Japan's average deflation rate of 1.4% over the past four years puts its real hourly compensation growth at a positive +0.2% -- the same as the European trend. The US stands out as something of a exception on the real pay front. With consumer inflation averaging 2.1% over the 2001-04 period, real compensation per hour in the US business sector expanded at a 1.2% rate over this four-year interval. But that needs to be put in the context of America's productivity performance -- average gains of 3% during 2001-04. Economics teaches us that trends in worker rewards and productivity go hand in hand over time. That most assuredly has not been the case in the United States in the early 2000s, with growth in real compensation per hour averaging only about one-third the pace of underlying productivity growth....
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