James Srodes The state of the Union is strong

JAMESSRODES | Veteran commentator on Washington & Wall Street

USA

“The State of the the Union is strong.”

Thus spoke US President Barak Obama when he delivered his third annual State of the Union to a joint session of Congress

Well, up to a point, Mr President. There are some happier indicators that the American economy has not slipped back into recession as it enters 2012. Unemployment has ticked just below the 9 per cent level, where it had been most of last year. Some manufacturing sectors like motor cars have at least regained their footing, if not record sales levels. Wall Street’s share price indicators are robust enough. And as for Mr Obama personally, the ordeal-by-sound-bite that is the Republican primary nominating process seems to be churning out a likely opponent – Mitt Romney – whose principal characteristic is that he could bore the face off a clock.

But the shopping list of policy recommendations Mr Obama presented to the American lawmakers was short on specific remedies for going forward toward a truly prosperous future. In fairness, that is in part a reflection of the political gridlock here in Washington where the White House is being held hostage by Republicans in the House of Representatives who see their primary mission to turf the incumbent out.

Politics aside, Mr Obama is hampered by the hard truth that there are fundamental shifts going on in the broader economy that make traditional government policy responses ineffective. And since no-one is sure just where those shifts are headed, it is hard to see what innovative response there can be other than to wait and hope for the best. And that, in essence, is what Mr Obama is doing.

Take the point he made in his address that from last July to November the US economy generated 653,000 net new jobs. That is good news but not nearly good enough and the jobless rate will still be above 8 per cent this November when voters go to the polls. More ominous is the fact that real personal disposable income fell in four of those five months. If US retailers were able to notch improved sales during the key Christmas holiday spending orgy, it was because consumers dipped into their savings forcing the overall savings rate down from 5 per cent to 3.5 per cent – back to the bad old days of 2007 – to finance their purchases.

Significantly, in those areas of US manufacturing that have regained some signs of life it is increasingly clear that management is choosing to buy more improved technology to further increase the productivity of the workers they have, and not hiring new workers to ramp up production. A recent study by the economists of the San Francisco Federal Reserve bank said this ‘jobless recovery’ breaks the pattern of past recession-recovery cycles. The Fed analysts speculated that the nature of manufacturing in a global marketplace may be imposing a fundamental change in the way makers hire workers from now on.

Financing debt

Another hole in the hull of the Ship of State that Mr Obama did not address is the fact that despite a year-long brawl with Congress over reducing the federal government’s budget deficits, Washington is poised this year to spend $3.6 trillion dollars, up from last year’s record $2.7 trillion. Last year of course was the year America lost its Standard and Poor’s triple-AAA credit rating.

The best estimates are that the eleven largest global economies will come to the bond markets to refinance maturing debt issues to the tune of $7.6 trillion – actually that amount will be in excess of $8 trillion once interest charges are added. Japan will tap the markets the most heavily with $3 trillion in offerings but the US will be right behind it asking for $2.8 trillion. Italy is scheduled to offer almost $500 billion in bonds; France is next with $367 billion; and Germany runs third in the European stakes with $285 billion in offerings due to come out. Canada, Brazil, the UK, China, India and Russia round out the field in that order.

Last year this was not a problem for the US Treasury. The crisis elsewhere in the world and the comparative stability of the United States was judged solid enough by investors to create a record demand for American government debt offerings. Overall, US Treasuries had their best performance since 1995. On average the agency received $3.04 in bids for each dollar of the $2.135 trillion in notes and bonds it sold. That’s a record. As late as the 20th December auction of $30 billion of four-week bills the Treasury received a bid- to-cover ratio of 9.03 that was an all-time high even though they pay zero per cent interest.

But the bond markets are not an inexhaustible fountain and can run, if not dry, at least to a trickle at a moment’s notice. First, the global markets will have to do more than refinance the maturing obligations of the eleven most debt heavy economies. The need for new money will push the total offerings of those leading nations to a $10 trillion high point in the next twelve months.

Moreover, most Wall Street analysts forecast that the borrowing costs for just the G-7 bloc will rise as much as 39 per cent over the coming year. For a basket-case like Greece, it may have to pay as much as 175 per cent more for its upcoming needs; but even Italy – the fourth largest economy in Europe – faces having to pay 40 per cent more than it did just last year.

All these factors are poised to test Mr Obama’s optimistic outlook for the future. He may well be re-elected to lead the United States come November. But he may rue the day. n