The Good, the Bad, and the Ambiguous
12:00 AM, Nov 5, 2011 • By IRWIN M. STELZER
There are three sorts of economic news: good, hinting that a recovery might be around the corner; ambiguous, perhaps hinting that a double dip is unlikely; and bad.
The good news is that auto sales rose 7.5 percent last month, and the economy grew 2.5 percent in the third quarter. U.S. banks have been able to sell bonds, reducing the threat of a credit crunch. And prices of condominiums in Florida are improving: bulk sales of distressed units now bring 75 cents for each dollar of debt, compared with 30-50 cents in the recent past. This uptick in one of the nation’s most troubled property markets might just be a sign of things to come in the still-depressed national housing market.
The ambiguous news comes from the report that the private sector added 104,000 jobs in October, offsetting a fall of 24,000 in government payrolls. The net increase of 80,000 jobs is far short of the 250,000 needed to make a meaningful dent in the unemployment rate. The estimate of the number of jobs created in August and September was revised upward by 102,000, the number of long-term unemployed (27 weeks or longer) fell by 366,000, and the unemployment rate dropped from 9.1 percent to 9 percent. Not much of an improvement: over 25 million Americans cannot find full-time work, but an indication that the jobs market has stabilized.
Now to the rest of the news, which is all bad. The Federal Reserve Board’s monetary policy gurus expect growth to be “frustratingly slow.” In April the Fed thought growth next year would clock in at 3.9 percent, revised down to 3.5 percent in June and to 2.7 percent earlier this week. Chairman Ben Bernanke admitted to reporters that the Fed’s forecasts have been overly optimistic, and warned that “significant downside risks” might once again force downward revisions in these new forecasts.
The Fed is not alone in its increasing pessimism. The Organisation for European Economic Cooperation and Development (OECD) only a few months ago expected the U.S. economy to grow next year at a 3.1 percent rate; it now thinks 1.8 percent is the right number. And consumer confidence last month reached its lowest level in two years.
The Fed guesses that by the time voters cast their ballots at the end of 2012, the unemployment rate will still be around 8.6 percent, not low enough to permit much presidential crowing, especially since the Fed also believes that full employment will not be reached until the unemployment rate falls to between 5.2 percent and 6 percent. That means wages will not rise significantly any time soon, putting added strain on families that have seen their real disposable incomes continue to fall as they wrestle with rising fuel and food prices.
This suggests that consumers will be in no position to drive a recovery. The deal-tracker web site Offers.com reports that only 18 percent of consumers surveyed plan to visit the malls on the Friday after Thanksgiving, dubbed Black Friday by storekeepers who believe that is the day the ink on their ledgers turns from red to black. Some stores, among them Macy’s and Target, will try to lure shoppers by opening at midnight on Thanksgiving, rather than restrain themselves until the more common opening time of somewhere between 4 and 6 a.m. on Black Friday.
It is unlikely that many bankers will be among those who do decide to do some early Christmas shopping. Fewer mergers and the fees they generate, a slowdown in bond sales and general mayhem in the markets is prompting a wave of layoffs, with no relief in sight as increased capital requirements squeeze margins. The global financial industry is undertaking what the Wall Street Journal calls “a massive retrenchment” after a massive expansion of its role in the world’s economies.
The Obama administration’s hope for an export-led recovery is fading fast. The eurozone tale needs no repeating here: it is a tale told by politicians, full of sound and fury, signifying very little by way of progress in getting stalled eurozone economies moving forward. Little hope for American firms seeking to expand exports, and for executives who had hoped that the just-concluded G20 meeting would offer meaningful solutions. It didn’t.
Nor can we look for much help from the emerging nations. China remains determined to keep its currency undervalued relative to the dollar and to make life difficult for American exporters, Brazil’s boom is cooling, India is grappling with corruption and an innovation-stifling bureaucracy, and Russia is, well, Russia. So much for the BRICs as locomotives to drive the U.S. economy.
Not that our politicians can lay the blame for the nation’s high unemployment rate and sluggish growth elsewhere. The president is in campaign mode, proposing solutions he knows Congress will reject, designed more to embarrass the Republican opposition than to boost growth. And if businessmen need any more reason to sit on their cash pile of over $2 trillion all they need do is look at the congressional supercommittee that was set up to bring the nation’s finances back to some semblance of order.
Its six members from each party are charged with lopping $1.2 trillion off the deficit over ten years. Experts say that is not enough, that a $4 trillion deficit reduction is needed if our debt is to avoid another downgrade and a possibly ruinous spike in interest rates. Unfortunately, the members are as far from agreement as ever. With the deadline for their report only 19 days away, Republicans are refusing to raise taxes, and Democrats are unwilling to make significant cuts in entitlement programs. Both, said former Republican senator Pete Domenici, are “complicit in letting America destroy itself.”
My own guess is that the supercommittee will first get Congress to postpone its deadline, and then cook up a huge batch of delectable fudge—savings from some vaguely identified future efficiencies; reductions (certain to be reversed in the next Congress) in Medicare reimbursements to doctors; unrealistically high growth and tax-revenue projections. And then announce victory, leaving Bernanke’s plea for a sensible fiscal policy to support the measures the Fed is taking to get the economy moving unanswered. He will have to wait until American voters decide whether four more years of Obama’s spend-borrow-and-tax beats a bet on whomever the Republican primary process throws up as an alternative.