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FAE speaker: Crash could have been worse

Chris Gaetano
Published Date:
Aug 8, 2014

Despite the financial sturm und drang of the last few years, James Glassman, Managing Director and Head Economist at JP Morgan, said that if he were to grade the U.S. on its economic recovery, he would give it an “A.” Surprised? Glassman, who made his remarks during the Foundation for Accounting Education’s CFOs, Controllers, Treasurers and Financial Professionals Conference, said the U.S. deserves some credit—things could have been much worse.

“My guess is if I asked you to grade the economic recovery, most people would give it a ‘C.’ It’s been, by [some measures], a ‘lot’ recovery—a lot of pain, a lot of unemployment,” he said. “But my perspective comes from my school days, back when you were graded on a curve… When you look at what’s been going on, I give it an ‘A’ on a curved score.”

He offered Japan as an example of how the crash might have been markedly worse. Japan had a financial crisis of its own in the 80s, in which its real estate market, its stock market and its economy as a whole, took a nosedive. It took the country two decades to begin climbing out of that hole. By contrast, the economic crisis in the U.S. began in 2007 and, as of this summer, the jobless rate has lowered to 6.1 percent, the fastest decline since the 1950s, Glassman said.

“The fact that we’re moving forward and a debate has built around when the Fed will raise [interest] rates is very telling,” he said. “When you think of the U.S. economy and the challenges we faced, you have to give the economy an ‘A’ … because it’s done quite well relative to what was holding us back.”

According to Glassman, what makes the U.S. different from Japan, allowing it to more easily bounce back, is the nature of our financial system. For example, he said, bankruptcy in the U.S. is seen as “a mechanism for calling time out and working out your problems,” rather than as an announcement that the company will soon cease to exist, as in other countries. Second, Glassman noted that, relative to the EU and Japan, the U.S. had securitized most of its residential loans.

“When we make mistakes and property values get way out of line… the market forces a discipline on us that they didn’t have in Japan or Europe,” he said. “… Banks had to mark to market the value of their portfolios to reconcile with the new reality, and as a result I think the mechanism helped us clear the decks more quickly and get this problem behind us in a way the Japanese did not.”

Japan took on a philosophy of “let’s earn our way out of the problem,” which takes much longer than simply biting the bullet, accepting the loss and moving on, Glassman said.

As a result of this structure, he added, the U.S. economy is doing relatively well: the equity market is “in record territory” and there are “huge opportunities opening up globally, and our business community is benefitting from that.” He dismissed concerns that this is due to distortions from the Federal Reserve’s move to keep interest rates at near zero levels, as the Fed does not create profits, or control the stock market.

“The market is taking its cue from what goes on in the business community, which is generating profitability we’ve never seen before, partly because the business community is always the first to come alive when things get moving,” he said. “They get their costs in line and things improve.”

Of course, Glassman, who categorized a lot of economic data as being “a mess,” said that the flood of numbers coming out don’t help people to understand the recovery any better. For instance, he said that according to GDP statistics, the economy shrunk 3 percent in the first quarter. However, we don’t know what happened in the second quarter, and if it turns out to have grown 3 percent, like some feel it will, that means the U.S. economy didn’t shrink but stalled in the first half of the year. Meanwhile, on the supply side, employment has been growing 230,000 jobs a month this year, up from about 180,000 to 190,000 last year. Further, total hours worked, which Glassman said “is the closest approximation we have to what goes on in national activity” has accelerated to a 3.5 percent annualized pace this year, versus 2 percent last year, while layoffs have been getting closer.

So which stat do you believe? Glassman said that economists generally favor looking at the employment side, though he said that even this can be problematic if you focus on the wrong things. For example, just because someone isn’t unemployed doesn’t mean they’re not underemployed—many companies chose to reduce hours rather than fire workers outright, so they’re not counted as jobless. Moreover, many young people chose to go back to school during the recession, and so even though they’re technically unemployed, they’re not counted as jobless either. Still, he felt that as long as you don’t take them as the sole metric by which to judge an economy’s health, they can be a useful indicator of what’s happening right now.

Another useful metric, he said, is inflation. In fact, he said, inflation is what tells him that, while progress is definitely being made, the economy still hasn’t made a full recovery.

“It’s running below 2 percent and the Fed’s aim is to get it to 2 percent,” he said. “It may take more than you think to get there because we need a fully employed economy to get the demand strong enough… Even though the markets smell recovery, from the Fed perspective, we’re not there yet, so this is why you hear [Fed Chair Janet Yellen] say the economy is doing fine but there’s still a lot of work to do.”

Glassman said that the country still needs a good three to five years of solid growth before the economy is being utilized to its full potential.

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