If you want to know why this economic forecaster is turning grey before your very eyes, or your investment adviser is mumbling incoherently when you dial him up for advice, consider the three important reports that were issued at the end of this week. The jobs report attracted most of the attention, and is bleak; the Federal Reserve Board’s survey of business conditions that preceded the jobs report was decidedly upbeat; and the report from the president’s National Commission on Fiscal Responsibility and Reform shined a bit of light at the end of the long deficit tunnel. The last item might prove to be the most important of all.
First, the much-watched and very disappointing jobs report. The economy created a measly 39,000 jobs in November, the net result of an increase of 50,000 in the private sector, and a decrease of 11,000 in the public sector. This low level of job creation, combined with the return of about 100,000 people to the labor force, produced a rise in the 9.6 percent unemployment rate of the past three months, to 9.8 percent. Add to the 15.1 million workers unable to find work, 6.3 million of them jobless for 27 weeks and longer, the 9 million involuntarily working short hours, and the 2.5 million who had looked for work in the past year but given up looking in November, and you have almost 27 million very distressed Americans, over 17 percent of the work force.
Second, the Federal Reserve Bank of Cleveland surveyed all the regions of the country and, in what is called the Beige Book, reports that “the economy continued to grow, on balance, during the reporting period from early/mid October to mid-November,” with the New York, Richmond (Virginia), Chicago, Minneapolis and Kansas City regions leading the parade of gainers.
Manufacturing activity expanded in November for the 16th straight month. So, too, did the service sector. Reports on consumer spending “tended to be positive,” says the Fed. Since then, we have found out just how positive. Sales at stores opened more than a year rose 6 percent in November, according to a Thomson Reuters survey of 27 retailers. That compares with a forecast of 3.6 percent and last year’s growth of an indiscernible 0.6 percent. It is unlikely that November’s rapid pace will be maintained for the entire holiday season. But the National Retail Federation is guessing that when the final holiday sales figures are tallied they will record a satisfactory increase of 2.3 percent over 2009, compared with a 0.4 percent increase last year and a 3.9 percent fall-off in 2008. Consumers continue to shop for bargains: Abercrombie & Fitch was rewarded for its new discounting policy with a 22 perfent increase in November sales as its teenage customers picked its shelves clean.
There is even a glimmer of bright in the darkness that surrounds the depressed housing sector. Pending home sales in October – the number of existing homes under contracts that have not been completed – shot up over 10 percent, making hash of the consensus forecast of a 1 percent decline. “The report suggests that data on existing home sales will be firm in the next month or two, when these transactions are closed,” says the Goldman Sachs economics team. This is either because of or despite the fact that the widely watched Case-Shiller home price index fell again in September (prices in the Washington area did not), although it remained a bit above year-earlier levels.
So far, economists have been unable to reconcile the good economic news with the bad news on the jobs front. Look for competing explanations, with those on the left blaming the lack of a stimulus, and those on the right blaming the lack of certainty due to tax rates and health care costs.
The third report might in the end prove to be the most consequential. The president’s National Commission on Fiscal Responsibility and Reform unburdened itself of recommendations to reduce the deficit to 2.3 percent of GDP from around 10 percent by 2015, and cap the federal government’s tax revenues at 21 percent of GDP. It calls for spending cuts that would reduce the federal work force by 200,000 (or 10 percent), tax increases, and paring some entitlements, including raising the retirement age to 68 by 2050 and to 69 by 2075, levels that would undoubtedly bring down several European governments.
Ignore the fact that the commission fell three votes short of attracting the 14 votes needed by the 18-member commission to trigger congressional action. The report has ended deficit-denial and triggered a discussion among commission members, in Congress, and in the influential think tanks as to which taxes to raise and which programs to cut.
No one expects Congress to take the commission medicine without altering its prescription. But there is reason to swallow a dose. Federal Reserve Board officials are quietly passing the word that the latest round of quantitative easing, QE2, will not succeed in bringing the unemployment rate down below the 10 percent to which it is almost certainly headed. So Fed chairman Ben Bernanke’s is not-so-discretely lobbying for a new stimulus package. But he is getting a mixed response.
In the new year, Republicans will control the House of Representatives, in which all spending and tax bills must originate. The president and the Democrats want a second stimulus because they are loathe to go into the 2012 elections with almost one-in-five Americans jobless. Republicans might, only might, go along if there is a parallel longer-term plan in place to bring the deficit under control. Bernanke is hoping that the Democrats’ high-spending deficit doves will be attracted by a new short-term stimulus plan, and the Republicans’ more tight-fisted deficit hawks by a longer-term plan to reduce the flood of red ink to a dribble. He might be disappointed. The Democrats’ leader in the House, Nancy Pelosi, is pledged to fight any and all spending cuts as a repudiation of her party’s historic mission to create social justice, and the Tea Party Republicans have promised voters that they would under no circumstances support even the tiniest tax increase lest it add more bloat to an over-bloated government. Bernanke, who anyhow has no standing with conservative Republicans, who opposed QE2, is in for a frustrating and nervous several months.