Stay in the Know! Check out Kitco's Full Range of Mobile Apps to Keep You Connected

(Kitco News) - With U.S. corporations sitting on hefty levels of cash, and with consumer debt falling, U.S. economic growth potentially could be greater than expected, according to an economist at a research firm.

General expectations are for the U.S. gross domestic product to rise about 2% in 2012, but Jeffrey Rosen, economist at Briefing Research, said there are several underappreciated areas of growth, with more potential for upside surprises than downside risks.

One of the biggest areas for growth stems from the amount of savings business firms have on their books. A third-quarter business survey showed that businesses have $542 billion more cash on hand than they have invested. When looking at the time frame from 1960-2008, that is seven standard deviations from the average, Rosen said. He spoke on a conference call on the U.S. economic growth prospects.

Rosen also said the liabilities versus cash flow category favors businesses. From 1970 to 2000, real liabilities annually grew 21.9%, while cash flow grew 12.9%. From 2008-2010 real liabilities grew 0.9% while cash flow grew 14.1%.  He said it’s not surprising to see liabilities shrink because of less risk-taking after the recession, but what it shows is that companies “have the ability to take on more liabilities,” he said.

If all of that cash was invested in the fourth quarter of 2011, GDP would have risen 19.1%
Considering that the return on cash is low because of current interest rates, costs for investments will also be low. “The return on investment doesn’t have to be very large to shift to spending from saving,” Rosen said.

What’s holding companies back is they are concerned about consumer demand, he said. 

“They see how consumers are restrained. You hear in earnings calls that they are unsure of demand,” Rosen said.

Yet, Rosen said, consumers may not be as constrained as believed. Their financial obligation ratio is the lowest since 1993, at 16.15%, versus 16% in 1993 and 18.8% in the third quarter of 2007. That ratio is determined by consumer credit debt and mortgage/rent payments.

“Consumers are better positioned now to increase their consumption, and finally take advantage of low interest rates since the recovery began. For example, the unemployment rate has fallen from 9.1% in August 2011 to 8.3% in January 2012. At the same time, the initial claims level has strengthened dramatically, falling to a level not seen since 2008,”

Rosen said in a research note related to the conference call.

While unemployment remains elevated and is a drag on the economy, Rosen said, job security for those who are unemployed is improving.

The total size of consumer debt remains near all-time highs, but the amount of debt has fallen, he said.

“Household net worth has deteriorated with declines in housing prices and equity values. Compared to pre-recession levels, households remain worse off. The decline in net worth, however, has slowed. Equity prices have rebounded and housing prices are nearing a bottom,” he said in the research note.

Rosen noted that for consumers who did not spend during the recession on big-ticket items like durable goods may have to start doing so as those goods start to wear out. He noted November and December consumer credit data increased sharply, which is a sign of growing demand.

There is potential for “positive feedback flow,” Rosen said. If companies start spending, whether it’s through hiring or increasing dividend payments to shareholders, it gets the money out in the economy. That gives consumers reason to start spending and demanding goods.

He added that for businesses to increase output they need to start hiring as productivity gains are maxed out on current employees.

Europe is a concern for many, but he said the U.S. should be largely sheltered to problems there as exports are limited. Even during the recent recession, drops in U.S. exports to the EU had only a 0.3% impact on GDP. The only caveat is if U.S. banks have big exposure to Europe.

“U.S. banks could have substantial losses if they have EU holdings…. However, problems in the EU have been going on for two years so if banks have had exposure to EU banks they’ve had time to get rid of those,” he said.

What’s preventing businesses and consumers from spending above all is fear, he said. There is fear that there will be another Lehman Brothers-style bankruptcy, or something else that will cause a slowly improving economy to pull back.

Another drag on the economy is “excessive austerity” on the part of governments. “If they pull back too much in the near-term it could offset the private sector growth,” he said.

He is less concerned about inflation if the economy improves. The rise in commodity prices over the past several months has had limited impact on consumer inflation, he said. “The key to inflation growth is income growth. If incomes increase, firms have the ability to pass on higher prices with minimal demand loss,” he said.

However, that has not been the case as firms have been holding down costs to prevent consumers to switching to other products.

By Debbie Carlson of Kitco News dcarlson@kitco.com

<<Back to more Kitco exclusive news