BOSTON -- Top economists who spoke here at the Insured Retirement Institute annual conference told attendees to brace for fundamental paradigm shifts as they wait for global and domestic economies to stabilize.

Gross domestic product growth in emerging market nations are currently at about 6%, eclipsing the flat-line 0% rate in the developed world. Moreover, GDP in developing nations tends to stay in positive territory during period of turbulence, said Mohammed El-Erian, PIMCO’s chief executive officer and co-chief investment officer. 

“The countries running surpluses are in the developing world,” El-Erian said. “Rich countries are running deficits and running liabilities.”

The much-cited 9.2% unemployment rate is actually as high as 16%, including those Americans who are underemployed. When people who have dropped out of the workforce are counted the rate is almost 20%.

“What is unusual is not that it is so high, but that it has remained so high,” El-Erian said. 

Over the long term, the numbers are even more stark, as 40% of the unemployed have been so for longer than 27 weeks. The picture is also grim for 16-to 19-year-olds, which have an unemployment rate of 25%.

Now that the U.S. is in the midst of a fundamental shift, it will take a shock to the system, or ‘Sputnik’ moment to jolt the system out of its inertia, he said. 

Another drop in unemployment numbers, or a second large bank failure similar to Lehman Brothers’ 2008 collapse, might provide the catalyst that policymakers need to address serious problems in the system. No one wants more pain for the unemployed, but the reality is that it might anger constituents enough to spur policymakers to act.

Decisive action from competent lawmakers would help turn the situation around, especially because multi-national corporations already have tremendous cash reserves, they said.

“We have lots of great companies in the U.S., multinational companies with $4 trillion of cash on their balance sheets,” El-Erian said. “They have turned out all their debt, and are still profitable. They see that the system still needs to play out. They need to see prices go low enough or policymakers engage the bridge.” 

The American public might believe that a lack of substantial job creation—and the resulting high unemployment—is suppressing economic activity, but those are topical symptoms of the underlying disease, David Kelly, managing director and chief market strategist at J.P. Morgan Funds said in a session on Monday.

“The underlying disease is there not enough demand,” Kelly said. “GDP growth does not justify any more job growth than we’re seeing. The prognosis has to change.”

Auto sales, homebuilding, equipment and inventory statistics combined will account for less than 20% of GDP in the long run, Kelly said. Evidence from the last couple of months sustains that point of view. For instance, auto sales were 12.9 million units over the last couple of months. That is a lousy number compared with the longer term average of 15.8 million. Therefore, 12.9 million is not enough to replace the cars being scrapped, Kelly said.

Housing starts fell to 567,000 in September, another sign of the long climb up the U.S. economy faces. From January 1959 until the last recession, there was not a single month in which housing starts tell below 798,000. Now they are at 576,000. Housing starts would have to increase 30% to get to the lowest water mark that the U.S. economy has seen prior to this, Kelly said.

Further, home prices are down 28% from their peak, which contradicts the old conventional wisdom that said house prices never decline. Home prices would have to increase 20% to return to the long-term home average of home prices. Those statistics contribute to American’s gloomy outlook, Kelly said. He added that if Americans wanted to, this would be the time to purchase a home.

Industry participants also fail to realize how much work people have done to improve their income statements, Kelly said. Americans’ mortgages accounted for 14% of their income in 2007, and that ratio has come down to 11%.

“It means people have the ability to borrow, if people will let them,” Kelly said.

The federal budget deficit and political environment appears to be an even larger ailment on the U.S. economy, according to Kelly’s remarks. At $1.3 trillion, the U.S. deficit represents about 8% of GDP. Had the U.S. Congress decided not to raise the debt ceiling, and enforced drastic cuts, it would have raised unemployment from 9.1% to 17%.

There are politicians today who say we did not need to increase the debt ceiling, and others who decided to use the situation to advance their own agendas, Kelly said.

“My view is they are not fit to hold office,” Kelly said. “We finally disarmed the doomsday machine and came up with a wimpy compromise.”

Instead of pushing their extreme points of view, politicians should come up with ways to chip away at the deficit 1% a year until it is under control.







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