Listening to perma-bears is never a pleasant experience. Especially when the stock market is once more heading aloft on the wings of optimism about a vibrant post-virus economy. But economist Stephen Roach always is worth listening to.
Roach warns that investors are foolish to believe the starry expectations that pent-up consumer demand, when finally able to express itself as folks emerge from their homebound exiles, will power a further boost.
Like most prominent bears, Roach, Morgan Stanley’s former chief economist, can point to times he has been right. Just last summer, as the strong dollar began to lose altitude, he predicted it had further to fall. It tumbled by 10% until February, when it began showing some signs, however fitful, of inching back up.
The case for a big burst in consumer spending is that savings have jumped amid the pandemic, to over 16%, as a share of income, which is more than double the level in 2019. Consulting firm Oxford Economics estimates that during the pandemic, US households saved $1.6 trillion more than they ordinarily would have.
S&P Global Ratings projects that the nation’s growth will rise by 4.2% in 2021—and by this year’s third quarter, gross domestic product (GDP) will recover to where it was at the end of 2019. Another much-touted accelerant is the $1.9 trillion aid package that President Joe Biden signed Thursday.
Nonetheless, Roach, now a Yale University senior fellow, thinks a lot of this consumer spending has happened already, thus dampening its economic effect.
“With vaccines rushing out together with a lot of stimulus, you can just sense this instant gratification of a long-deferred pent-up demand,” Roach said on CNBC, echoing a downbeat essay he recently penned. “But as I look at the numbers, you know, most of that surge has probably already occurred.
“We’re back to levels of consumer durables that we haven’t been at in about 13, 14 years,” Roach continued. “We’ve done the pent-up demand to a large extent, and it looks like it’s borrowing from growth that might have otherwise occurred in the second half of this year or early 2022.”
What about the massive federal aid Biden has approved? It’s a temporary boon, because the relief checks aren’t permanent ongoing income, by Roach’s assessment. Indeed, unemployment is still on the high side, at 6.2%, albeit a reduction from previous levels. Yet that figure would be even higher if you factor in the large numbers of the jobless quitting their quest for work, who aren’t included in the labor pool anymore.
Roach added that once vaccinations become widespread he doubts people will move from their current heavy buying of furniture and autos to entertainment and other pre-COVID-19 activities. Reason: the psychological impact of virus fear.
“These face-to-face activities are still lagging in terms of employment and demand,” he said. “Even as we get vaccines, I think there is going to be some significant long-term scarring here.” And that will last, he predicted, “for quarters if not years to come.”
In his essay, Roach noted that the spending thus far has come from the well-off, who shouldn’t be used to generalize the entire population. “The fortunate have managed to do well, but a large swatch of the nation has not, and they are unlikely to unleash anything in the way of pent-up demand,” he wrote.
“It’s going to be very difficult to sustain this V-shaped trajectory that many have been counting on,” Roach said.
On the plus side, he suspected this big letdown would squelch any future inflation and lead to a decrease in the benchmark 10-year Treasury yield. It has climbed to 1.53%, up from 0.9% at the start of the year, due to anticipation of faster GDP growth and inflation.