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No Spurt, No Dip

12:00 AM, Dec 3, 2011 • By IRWIN M. STELZER
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“[A] U.S. recession caused by the fiscal crisis in Europe would be very costly and could throw millions of Americans out of work.” So says the Center for Economic and Policy Research, a think tank that numbers Pulitzer Prize winning, generally liberal economists Joe Stiglitz and Robert Solow among its advisory board members. This is consistent with the story being put out by the White House. After three years in office, President Obama can’t credibly blame the nation’s economic difficulties on his predecessor—he owns the economy, as we say in Washington—and without George W. Bush to kick around anymore has selected a new villain: Europe. Weakness in our economy is due to squabbling European politicians, any strength to the wisdom of Obama’s policies. Or so administration spokesmen contend.

Wall Street

With U.S. money markets reluctant to perform their traditional role as suppliers of dollars to European banks, those banks were short of dollars to lend to corporations who borrow in the U.S. currency. So all the president’s men heaved a sigh of relief when Federal Reserve Board chairman Ben Bernanke lowered the rate he charges other central banks for dollars, and those banks lowered the rates they charge commercial banks in their countries for loans. The hope is that this coordinated effort will at least delay an impending financial disaster. In short, the Fed rushed in where the European Central Bank feared to tread. 

In the long run, of course, the injection of liquidity won’t solve the problems of insolvent and unreformed eurozone economies. Bernanke has administered an aspirin to a patient suffering from a possibly terminal ailment, and by easing the pain might in fact have discouraged a needed, often promised but never implemented reform in life style.

In addition to worries about importing the woes of Europe, the Fed has to be concerned about Friday’s report that the economy created only 120,000 new jobs in November. Don’t be fooled by the drop in the headline unemployment rate from 9.0 percent in October to 8.6 percent last month. That was due in good part to a decline in what is called the labor force participation rate to its lowest level in 27 years (with the exception of one month), and, according to the Manhattan Institute’s Diana Furchtgott-Roth, to the addition of 50,000 retail jobs, filled by poorly educated workers who might become dispensable after the holiday rush. The headline unemployment number is, of course, the one that most concerns politicians whose eyes are on November 6, 2012, the day Americans will decide whether to send Obama and/or many incumbent congressmen packing.

Even before the new rather weak jobs report appeared, economists at the Organisation for Economic Co-operation and Development downgraded their U.S. growth forecast. Only six months ago the OECD guessed that the U.S. would grow at an annual rate of 3 percent next year. It now puts that figure at 2.1 percent, almost one-third lower.

Gloomier still is the Lindsey Group’s analysis of the jobs report. The consultancy’s economists believe that the labor market “seems to be signaling” that, unlike past recessions, the recent one will not be followed by a catch-up growth spurt, but will continue to plod along at something like its current rate.

This, despite some better news about the economy: Retail sales this past Thanksgiving weekend, which includes the mad dash for bargains on Black Friday, the day retailers’ red ink turns to black, came to $52.4 billion according to the National Retail Federation. That beats last year’s figure by 16.7 percent. Online sales jumped by 39 percent. With so many bargains on offer, analysts worry that the sales spurt might not do much to help retailers’ bottom lines. And the grinchy analysts are sticking with their forecast that, when the shops close on New Year’s Eve, total sales will have exceeded last year’s by a mere 3 percent. Like the signal from the labor market, the retail sales figures suggest no boom, but no recession either.

That view is supported by the latest Fed survey of what is going on around the country. It concludes, “Overall economic activity increased at a slow to moderate pace … across all Federal Reserve Districts except St. Louis.” The biggest drag remains the housing sector. But sales of both new and previously owned homes rose in October by 1.3 percent and 1.4 percent, respectively, and pending home sales (contracts not yet completed) were up by 10.4 percent in November compared with October. More important, the rise in rents and the continued fall in house prices, which are now at their lowest level since early 2003, has tipped the affordability scale in favor of buying over renting. If mortgage rates remain at or below 4 percent, their lowest level in sixty years, the increase in the relative attractiveness of home ownership just might move up the date at which the housing sector, and with it construction, begin to recover. But there is a long way to go: some 1.6 million single-family homes are either in default or foreclosure, and if the banks sell them off at the usual rate they will overhang the market until 2020. Still, after analyzing long-term trends in population growth and housing supply, Bernd Weidensteiner at the Commerzbank concludes, “Higher spending on residential construction is only a matter of time. Moderate residential growth can already be expected in 2012….Long-term demand for housing is massively above the current level of construction activity.”

The manufacturing sector also shows a bit of strength. Unlike those of France, Germany, Britain, and China—and of the eurozone as a whole—the U.S. manufacturing sector expanded in November. New orders rose at the fastest pace in the past seven months. And despite the troubles in Europe, exports orders rose.

Sorting out these data is no easy chore. My own conclusion is that the economy is likely to continue to grow at a modest pace. Job creation will continue at a very slow pace, meaning that the unemployment rate will fall significantly only if more and more workers drop out of the work force. Given employers’ complaints about their inability to find qualified workers to fill many of the 3.4 million job openings, there is reason to worry that even if growth accelerates, the new “normal” level of unemployment will remain well above pre-recession levels. In short, no sharp recovery, but no double-dip.

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