A Collective Sigh of Relief - Deloitte

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Global Economic Outlook 2nd Quarter 2012 16 If debt cannot be reduced through the process of deleveraging, the only other alternative is a reduction of the debt burden through inflation. encourage leverage and put off the adjustment process of deleveraging, distorting the economy and making the eventual day of reckoning all the more severe. Debt declined slightly during 2008 and 2009 (see figure 4). The decline was due largely to the sizable reduction in mortgage debt that has come about through the foreclosure process. Banks have also been forced to reduce debt through a tightening of the regulatory process. Nonfinancial businesses have seen their debt grow modestly, and government debt growth has risen sharply. Over the past year, total debt has increased by $781 billion. Nominal GDP grew by just $566 billion. Debt is still being accumulated faster than GDP is growing. Figure 4. U.S. total debt (In trillions of dollars) 55.0 50.0 45.0 $40.0 2006 2007 2008 2009 2010 2011 Source: U.S. Federal Reserve If debt cannot be reduced through the process of deleveraging, the only other alternative is a reduction of the debt burden through inflation. The rise of debt over the past year greatly increases the future risk of much higher inflation. Curb your enthusiasm: Just the facts The disconnect between equity markets and the real economy can be seen in myriad different statistics. Here are the most troubling of them: 1. Globally, real GDP growth contracted in no less than 22 countries in Q4 2011, including Japan, Germany, Italy, Spain, the United Kingdom, Thailand, Singapore, Taiwan, Indonesia, and Portugal. Purchasing managers’ indices throughout Europe in the first quarter of 2012 show the decline continuing and deepening. 2. In the United States, employment growth is mainly in lower-paying jobs and temporary employment. The economy still has 5.3 million fewer jobs than when the recession started in December 2007. 3. The primary target of quantitative easing in the United States was housing. It was hoped that lower mortgage rates would stimulate borrowing. In mid-March, the Mortgage Bankers Association’s index for new mortgage applications had declined eight weeks in a row. 4. Despite unseasonably warm weather across the United States in February, which should have boosted housing activity, new home sales fell 1.6 percent, existing home sales fell 0.8 percent, pending sales of existing homes fell 0.5 percent, and housing starts fell 1.1 percent. It is difficult for the economy in the United States to recover without a recovery in housing. A robust housing market gives a lift to new home construction, real estate, financial services, and retail. 5. In addition to a decline in home sales, home prices are also falling. Despite multiple predictions that housing has finally started to recover, home prices continue to fall. The most recent Case-Shiller Home Price Index was down 3.8 percent from a year ago and remains at its lowest level since the peak in home prices in March 2007. 6. Business investment in information technology has been weak. New orders for computers and related
Figure 5. Equally weighted coincidental indicator (Percentage change — year-over-year) 10 8 6 4 2 0 -2 -4 -6 USA Geographies -8 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: Bureau of Economic Analysis, Department of Labor, Bureau of Census and Federal Reserve equipment were down three of the past four months from October to February, for a total decline of 14.9 percent. Shipments fell just 12.8 percent as the backlog of unfilled orders contracted. 7. U.S. energy consumption is declining sharply. Gasoline supplied to retail outlets is down 6.7 percent from a year ago in March. Oil consumption is down 4.5 percent. These are the largest year-over-year declines in more than 20 years, exceeding the declines that occurred during the 2007–2009 recession. 8. Shipping is showing multiple signs of distress. Trucking and rail indexes are both declining. The American Trucking Association’s truck tonnage index was down 4.1 percent in February from its reading in December. North American railcar loadings for the month of February were down 2.9 percent compared to January and down 1.9 percent from a year ago. The Baltic Dry Index, a measure of global shipping rates, collapsed from October to February, dropping from 2,173 to 647 before rebounding in recent weeks to a stilldepressed 908. As recently as June 2010, the index was above 3,800. 9. Income from interest payments is again declining. Operation Twist, which was designed to depress long-term interest rates in hopes of stimulating housing, has had an ill effect on interest income. While housing continues to flounder, interest income has been declining. After a very brief recovery in 2011, in January, interest income was down 2.8 percent from a year ago. 10. Federal tax revenues are slumping. Over the past three months ending in February, revenues are up just 0.6 percent from a year ago when revenues were depressed by the initiation of the temporary Social Security tax cut, which was extended through this year. 11. Real income excluding government welfare payments is still down 3.9 percent from its 2008 peak. Government transfer payments now account for 19.5 percent of all household income. Real disposable income was up just 0.5 percent in January. Real disposable income including transfers is up just 0.5 percent from a year ago. Where we are: Coincidental indicators Since the end of World War II, there have been 14 cases where real GDP growth from the previous year fell below 2 percent. In 11 of those cases, a recession followed. You can build a coincidental indicator of the economy using real disposable income, employment industrial production, and real consumer spending, and you get largely the same picture. Over the past 50 years, when this coincidental indicator fell below 2 percent for more than two consecutive months, a recession followed (see figure 5). The indicator has correctly anticipated all eight post-1960 recessions, including the 17
Page 1 and 2: A Deloitte Research publication | 2
Page 3 and 4: iorating situation. Siddharth concl
Page 5 and 6: 32 34 36 40 32 Brazil: Worried abou
Page 7 and 8: Figure 1. Use of ECB's deposit faci
Page 9 and 10: Figure 2. Economic Sentiment Indica
Page 11 and 12: competitiveness is based on product
Page 13 and 14: USA Geographies 13
Page 15: Figure 3. Average price of regular
Page 19 and 20: Energy prices and consumer behavior
Page 21 and 22: Longer term Recovery overseas will
Page 23 and 24: UK Geographies 23
Page 25 and 26: hardly been eliminated. From the hi
Page 27 and 28: India Geographies 27
Page 29 and 30: At a time when the government can i
Page 31 and 32: The solution, according to Prime Mi
Page 33 and 34: grew, but at a slower rate than in
Page 35 and 36: that if the price of oil were to de
Page 37 and 38: A step in the right direction Indon
Page 39 and 40: Persistent challenges Pervasive cor
Page 41 and 42: India’s recent economic interest
Page 43 and 44: Trade patterns of the future: Wakin
Page 45 and 46: Yield curves (as on April 6, 2012)*
Page 47 and 48: Contact information Global Economic

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