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Here Comes a Recovery—Maybe

12:00 AM, Mar 3, 2012 • By IRWIN M. STELZER
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Don’t feel embarrassed if you can’t figure out where the American economy is headed. I don't. After all, Federal Reserve Board chairman Ben Bernanke told the House Financial Services Committee last week that the economy is sending “somewhat different signals” about growth. The good news is that the signals seem to differ only in the speed and strength of the economic recovery that now seems to be underway.

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A survey of business conditions around the country by the Federal Reserve Bank of St. Louis concludes, “overall economic activity continued to increase at a modest to moderate pace…. Manufacturing continued to expand at a steady pace across the nation … [with] increases in new orders, shipments or production … [and] gains in capital spending.” Good news, too, from nonfinancial services industries and on the consumer front, with “the sales outlook for the near future … mostly optimistic.”

There is more, and better. The stock market has opened the year with its best performance since 1998. The Federal Deposit Insurance Corporation reports that bank lending in the final quarter of 2011 grew at the fastest rate in four years. 

The Conference Board finds that consumer confidence rose sharply in February, in part because the labor market has improved. Wage and salary income is up 5 percent over last year, and the Economist reports that the number of unemployed workers per job opening has fallen from a peak of seven workers to below four. Even though some of the wage gains were wiped out by inflation, what John Maynard Keynes called “the money illusion” operates to make people feel good when their pay packets thicken even if each dollar buys less.

More confidence and more money mean more sales. Cars are selling at their fastest pace in four years. A group of 18 leading retailers reports that sales in February rose by 6.4 percent – high-end Nordstrom up 10 percent, mid-range Macy’s up 4.6 percent, low-price Target up 7 percent. All benefited from an 8.5 percent increase the average person spent on Valentine’s Day items, especially the Limited’s Victoria’s Secret chain, which saw sales jump 10 percent.

It doesn’t get much better than that for an economy that many forecasters thought would tip into recession. Perhaps the only thing that can make the White House happier than watching the president’s Republican opponents destroy one another is this recent turn in the economy. But it’s a long, long way from March to November, when voters go to the polls. For one thing there is the small matter of rising gasoline prices. These morph from merely irritating to “why doesn’t the president do something?” when the national average hits $4 per gallon, which level already prevails in some parts of the country. John Hofmeister, former president of Shell Oil, expects prices to reach $5 per gallon this year. If prices do soar to that level voters would wonder why the president will not allow drilling in Alaska, or in much of the offshore, and why he refused to grant permits to a pipeline that would have permitted the importation of more oil from Canada, America’s largest and most stable source of crude. He would be hard pressed to explain how the green energy sources he has been subsidizing are of any use to motorists, who can’t pull their cars up to the nearest windmill for a refill.

Deutsche Bank figures that the burden of oil prices on the economy is already at the highest level since 1983. Anything higher would almost certainly abort the recovery, as past price spikes have done, which is one reason Obama will try to persuade Israeli prime minister Benjamin Netanyahu at their meeting on Monday, to keep his jets on the ground and give sanctions a chance to work. Netanyahu will have to decide whether to risk his nation’s survival by crediting the president’s promise to use American military assets to knock out Iran’s nuclear facilities if sanctions fail to stop Iran from getting a nuclear weapon.

Then there is the housing market. Some experts are guessing that it has hit bottom, ending the fall that has been a drag on the economy. But many potential buyers can’t meet new stringent mortgage loan requirements; others are holding off because they fear prices have yet to stabilize; repossessed homes continue to glut the lower end of the market, and things will get worse when technical legal objections to default are solved. Worst of all for household balance sheets, house prices ended 2011 at their lowest level since 2003. “Problems in U.S. housing and mortgage markets have continued to hold down not only construction and related industries, but also household wealth and confidence,” Bernanke told his congressional interlocutors. That’s one reason the Fed chairman sticks to his forecast of unspectacular growth this year and next.

Finally, Obama might get tripped up by developments in the bond market. Investors see the dollar as a safe haven, and are willing to lend America the huge sums we need to borrow despite receiving very low interest rates on their loans. That might not last. China has already signaled its increasing reluctance to add to its dollar holdings and, despite eurozone problems, its intention to invest more in Europe. Only 15 percent of the recent increase in China’s foreign reserves went to the purchase of U.S. securities, down from 45 percent in 2010. And the rating agencies might lose patience with our political stalemate. If interest rates rise, we will have to pay more to borrow to fund our Grecian-level deficits, and low mortgage rates that have prevented a complete collapse of the housing market will be a fond memory. Obama would find it difficult to defend his borrow-and-spend policy in the face of the inevitable economic slow-down.

With over 60 percent of Americans telling Gallup pollsters that the economy and jobs are their top concerns, voters will agree with Bernanke that “It will be especially important to evaluate incoming information to assess the underlying pace of economic recovery.” Democrats will spin incoming data to support their argument that thanks to the president things are getting much better. Republicans will spin those same data to prove that America is in bad shape and getting worse. The truth so far lies between much better and worse.   

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