PIMCO's El-Erian: America Is Healing, Slowly

(June 5, 2012) — A variety of factors suggest that the United States’ economy is slowly healing, according to Mohamed El-Erian, the CEO and co-Chief Investment Officer of the Pacific Investment Management Co. (PIMCO).

However, the problem is that these factors, both individually and in combination, are unlikely to be a game-changer, largely due to the fact that “too many sectors of the US economy have not completed their balance-sheet rehabilitation process,” he writes in an article originally published on Project Syndicate. Commenting on signs of improvement for the US economy, El-Erian writes: “For starters, large US multinational companies are as healthy as I have ever seen them.” He adds that rich households also hold significant resources that could be deployed in support of both consumption and investment.

Furthermore, the head of the roughly $1.4 trillion bond fund manager notes that housing and the labor market are on the upswing. “These two long-standing areas of persistent weakness have constituted a major drag on the type of cyclical dynamics that traditionally thrust the US out of its periodic economic slowdowns,” El-Erian writes. “But recent data support the view that the housing sector could be in the process of establishing a bottom, albeit an elongated one. Meanwhile, job growth, while anemic, has nonetheless been consistently positive since September 2010.”

The Federal Reserve’s seemingly activist position in the face of a weakening economy is additionally promising, according to El-Erian.

He concludes that despite these beacons of hope pointing to the healing of the US economy, “a lot more needs to happen – indeed, urgently – to restore its traditional vigor and vitality.” El-Erian continues: “Most important, robust recovery requires a degree of seriousness and constructive collaboration in Washington that seems elusive today.”

Dean Baker, co-director of the Center for Economic and Policy Research in Washington, tells aiCIO that he is on roughly the same page as El-Erian regarding the future of the US economy. “While the US economy is improving, I think it will be years before the economy is back,” he says. “We had a weak quarter. The latest job numbers don’t look that good. We’re looking at six to seven years before we see any strong results.”

Baker continues to point out that there is no reason to think that over the long-term the US economy is crippled. “Investors in the US clearly don’t have the same uncertainly as the European market,” he says, adding that the threat of companies and banks being insolvent if the Euro collapses is a looming threat. “As an investor, you need to recognize the risk in Europe. You don’t want to pull out completely, and while the US has relatively little downside risk, it’s not a great growth opportunity but one you can feel comfortable with. Emerging markets continues to be the area with the most growth potential.”