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Mixed Messages on the Economy

You have every right to be confused.

12:00 AM, Jul 24, 2010 • By IRWIN M. STELZER
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“The Economy Is Back,” trumpets the upper left  corner of the cover of Time magazine. “The Economy Stinks,” moans the lower right corner. More professionally, Federal Reserve Board chairman Ben Bernanke tells Congress that most of the participants on the Fed’s monetary policy committee view “uncertainty about the outlook for growth and unemployment as greater than normal.” Titans of industry are also confused. They can’t decide whether to give more weight to the good news than the bad, and so they are sitting on $2 trillion in cash that, because of low interest rates, is earning almost nothing. They can’t even seem to find acquisitions that are both strategically sensible and well-priced.

Mixed Messages on the Economy

Then there are the expert policymakers. The Organisation for Economic Co-operation and Development (OECD) and the Bank for International Settlements (BIS) are suggesting you lose sleep worrying about the inflation that they think will inevitably result from a long period of low interest rates and excessive money creation. But the International Monetary Fund wants central banks to keep interest rates low to offset the fiscal tightening it is prescribing for most countries. And just in case you have sorted that out, along come some experts, several of them high Fed officials, warning that we are fighting the wrong war when we worry about inflation. It is deflation that is looming, witness hints that price levels are declining. This, they say, is what really should keep you awake at night, since once it takes hold, deflation is terribly difficult to root out of the system, as Japan painfully learned.

What many believe to be the best leading indicator of all -- share prices -- is of little help. Companies announce earnings that beat expectations, and the prices of their shares drop. No sooner have analysts chortled about a triple-digit jump in the averages than they are explaining the next day’s even larger triple-digit decline.

President Obama professes satisfaction at the fact that the private sector has created new jobs in each of the past six months, and then presses Congress to pass a second stimulus because, it seems, the jobs market is weak. Bernanke says that because “financial conditions … have become less supportive of economic growth in recent months” the jobs market is weak he will keep interest rates “very low,” and then announces that he and his colleagues expect economic growth this year to come in at what I would term a satisfactory rate at 3-3.5 percent, and an even better 3.5-4.5 percent rate in 2011 and 2012.      

Then there is Congress. Its members are upset that banks are not lending more freely to the small businesses that account for a large portion of job growth, but pass a massive regulation bill that will undoubtedly cut into bank profits and ability to lend. Congress wants businesses to invest, but refuses to cut back the debt-fuelled spending that everyone knows will result in higher taxes on small businessmen. Lest a few entrepreneurs fail to notice, the president announces that he plans to do just that, if he can get a few reluctant Democrats to go along with the repeal of the “Bush tax cuts for the rich.” And last week, after months of railing against imprudent mortgage lending to sub-prime borrowers, politicians permitted government-owned General Motors to spend $3.5 billion to buy AmeriCredit, a company that specializes in car loans to sub-prime credit risks and in the securitization of those loans.

So don’t feel badly if you are confused by the signals coming from the economy and the pundits. If Bernanke and his gaggle of expert economy-watchers are more uncertain than normal, and corporate chieftains don’t know what to make of conflicting signals, and policy wonks conjure up conflicting tales of danger, you have every right to be confused.      

To add to uncertainty, we are in a pre-election period that is unlikely to bring out the best in the political class. Partisanship trumps the public interest, and will until the new congress is sworn in after the new year. Indeed, since defeated members return to their seats and can vote between the November elections and the seating of the new members in January, even the constraint that now exists from the need to obtain democratic legitimacy will be removed.

So, what to make all of this? First, don’t look for a certain guide to the economic future. There is none. You would do as well in predicting the future to engage in the minute inspection of the entrails of a goose as to pore over recent economic data.

Second, concentrate on the bits that are more rather than less certain:

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