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Stephen Roach: Keep the Champagne on Ice

“Financial markets and their cheering section are trumpeting the U.S. economic recovery, but it may be a false dawn in America, according to Stephen Roach, a Yale University economist and former Morgan Stanley Asia chairman.

Roach said the good news is that GDP appeared to grow in the back half of 2013, the official jobless rate is down and the Federal Reserve feels confident enough to taper back on its mountain of monetary stimulus.

“But my advice is to keep the champagne on ice,” he said in an opinion piece for Project Syndicate. “Two quarters of strengthening GDP hardly indicates a breakout from anemic recovery. The same thing has happened twice since the end of the Great Recession in mid-2009. . . . In both cases, the uptick proved to be short-lived.”

Roach suspects most of the “growth” the nation has experienced is derived from inventory re-stocking by companies rather than actual sales. In reality, he said, the nation is caught in the vice of a continuing “balance-sheet recession” among consumer households.

“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.

“Not this time. The record plunge in consumer demand during the Great Recession has been followed by persistently subpar consumption growth.”

Roach compared the American consumer to Japan’s corporate “zombies” — companies that have been rendered essentially lifeless by balance-sheet problems for years on end, but which are still in business….”

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