Recession in 2004?

Okay, I don’t really think that we’re going to have a full-blown recession next year in the US. However, as I’ve alluded several times, I do think that economic growth in the US will slow considerably over the next 6-12 months. And in just the last week, I’ve encountered a raft of people who agree with me. Here are some examples that echo my fears about the US economy for 2004:

Stephen Roach, chief economist of Morgan Stanley:

In today’s US economy, there’s a veritable lack of pent-up demand in the two sectors that normally spark cyclical upturns; consumer durables currently stand at a record 11.4% of GDP versus a sub-7% reading in the early 1990s, and residential construction has moved up to a cycle high 4.3% of GDP versus a 3.3% reading a decade ago. Lacking in classic sources of pent-up demand, America is more than ever in need of new sources of growth.

Justin Lahart, commentator for CNN/Money:

Structurally the economy doesn’t look the way it has at the beginning of past recessions. The current account deficit — the gap in the United States’ trade in goods and services with the rest of the world — has risen to about 5 percent of the total economy. That’s as high as it’s ever been. In contrast, at the beginning of past economic expansions the current account has tended to be in surplus.

Housing prices usually get hurt during recessions. In this one, they did not. Consumer spending usually sees some sort of slowing. Again, didn’t happen this time.

For some economists, these things represent structural flaws in the economy which will make the expansion less potent and less long than the ones that preceded it.

And finally, from The Economist:

The main reason for doubting that America is back on a path of strong, sustainable growth is that it has failed to purge the excesses of its previous boom. It is, to say the least, odd that at the beginning of an economic recovery many indicators—low saving, rampant household borrowing, record house-building and uncomfortably high stockmarket p/e ratios to name but a few—have more the look of a cycle that is drawing to a close.

I think the US economy is going to do fine in the short-run. But I do worry that these long-term imbalances are going to make it impossible for the US to enjoy a sustained boom over the next several years, as we would normally expect at this stage in the business cycle. And judging by some of the financial press recently, I am apparently not alone.