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Good News: Short Term Economic Recovery Looks Possible

Here's the bad news: It says nothing of the long term recovery, and spending is out of control.

12:00 AM, Mar 6, 2010 • By IRWIN M. STELZER
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Barack Obama, or his successor, will have a lot to answer for when the bills come due for his spending spree. But for now, he is due some credit for helping the U.S. economy to get back on track, while the eurozone lags, and for the relatively strong performance of the dollar, while the euro weeps at the unfolding Greek tragedy.

Good News: Short Term Economic Recovery Looks Possible

The Federal Reserve’s recent survey of business conditions around the country concludes that “economic conditions continued to expand since the last [monthly] report;” Fed chairman Ben Bernanke guesses that the economy will grow at an annual rate of around 3 percent in the near term; and the Economist Intelligence Unit (EIU) has raised its 2010 growth forecast to 2.8 percent from 2.5 percent, despite forecasting a “gradual withdrawal” of stimulus, including an increase in the fed funds rate. Throw in a musing by White House economic adviser Larry Summers that this might be a recovery in which employment grows faster than GDP -- the opposite of past experience -- and the president just might have a good story to tell come the November congressional elections. Indeed, he better have one, since if he pushes through his much-disliked health care plan by Easter, as now seems possible, his party’s candidates will have to explain why they rushed to do so before returning to hear their constituents’ views during the Easter recess.

These rather cheery forecasts represent the balancing of decidedly mixed signals. The manufacturing sector continues to expand, but not at the increasing rate of recent months. “We’re really at that point where we are starting to level out,” says Norbert Ore, chairman of the committee that surveys manufacturers. Consumer spending has started the year by posting what Goldman Sachs’ economists characterize as “firm gains,” this despite terrible weather conditions last month, but the increase in spending exceeds the growth in incomes, and so might not be sustainable. World trade is recovering, but the huge imbalances between net importer America and exporters such as China and Germany remain. Private sector balance sheets are in better shape as consumers have scaled back debt, but public sector balance sheets are a shambles. As the EIU puts it, “Major economies such as the US have merely shifted liabilities from one part of the economy to the other and merely postponed, rather than avoided, a needed adjustment.”

I recite these difficult-to-read runes not to seek sympathy for those of us who are charged with deciphering them, although such sympathy would be much appreciated. Rather, I mention them for two reasons. First, it is important to take any economic forecast with a mine of salt: The more confident the forecaster sounds, the warier the reader or auditor should be. Crystal balls are inevitably fogged in an economy as huge and fast-changing as ours.

Second, even if it is reasonable to interpret this data as indicating that 2010 will see a decent recovery, especially if we factor in the stimulus money that will hit the streets in coming months, that tells us not very much about the long term outlook. 

Consumer confidence is low, and Mr. Summers’ musings notwithstanding, the unemployment rate is more rather than less likely to remain high in 2011 and on into 2012. No recovery will be robust or sustainable unless consumer demand, which accounts for approximately 70 percent of economic activity, returns to something like normal levels. Most observers just do not see that happening. John Makin, an economist at the American Enterprise Institute, a Washington think tank, writes in his latest economic outlook, “The sustainability of US demand growth, the key to a solid recovery, remains in question as the improvement in employment data has stalled while consumer confidence has remained weak.” Add the fact that U.S. households are still deeply in debt, and there is reason for pessimism about the ability of the consumer to power a significant long term recovery.

And any hope of an export-led recovery was dashed last week when it became apparent that economic growth in Europe has stalled. With so many European countries scrambling to de-leverage their national accounts, Europe’s ability to absorb imports from America is headed down, not up. Austerity programs being put in place in Greece and elsewhere will certainly curtail their citizens’ ability to pay for imports,  

Of course, a significant increase in job creation would change the outlook. Data released yesterday provide at least a slim hope that the employment picture might be about to brighten. The unemployment rate stabilized at 9.7 percent, and job losses was relatively limited, at least by the standards of last year. But one month does not make a trend, and we have to assume that it will take a sizable increase in economic activity before the recent increase in temporary hires converts into offers of permanent, full time employment. 

The outlook is worsened by the sorry state of the public finances, both at the state and federal levels. California and New York are only the most publicized examples of the many states that are in no better shape than Greece, and being forced to cut back on jobs and capital projects. And the condition of the federal books would be even worse were it not for the fact that in the end the federal government can print its way out of the problem. Deficits are high and rising, the congress is readying still more spending bills, and the president is insisting that congress enact his trillion dollar health care bill. Damn the red ink, full speed ahead.

Being unwilling to rein in spending, the president will soon be proposing further tax increases of a size that will dwarf the few tax breaks he is offering to small businesses that take on new workers. No one doubts that the commission the president is appointing to find a way out of the fiscal mess into which the nation has descended will recommend tax increases now, and spending cuts, if any, much later. Or that Congress might well decide to do neither, and Micawber-like, simply hope that something turns up.

That means we have an odd situation. We are to have jam today, this year, and perhaps even next, with the bill to come due shortly thereafter. If Obama has his way, that won’t happen until after his reelection in 2012.

Irwin M. Stelzer is a contributing editor to The Weekly Standard, director of -economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).

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