Some Economic Cheer, Some Worries
12:00 AM, Jan 8, 2011 • By IRWIN M. STELZER
It is not for nothing that Victorian historian Thomas Carlyle’s description of economics as the “dismal science” hangs around the profession’s neck like some dreadful albatross. For where most people see clear blue skies, we see clouds. Just as the American economy is picking up, threats are looming to the new, stronger recovery from far away places, most particularly Europe and China, and from here at home, in Washington. But first the good news.
Both the manufacturing and service sectors are growing, with new orders for manufactured goods leading the parade of good news, and the service sector expanding for 12 consecutive months. Auto sales rose last month for the eleventh consecutive month, with sales of light trucks and big SUVs leading the way; General Motors predicts the industry’s sales of cars and light trucks will hit between 13 million and 13.5 million vehicles, a significant rise from last year’s 12 million. The two-month holiday season was the best for retailers since 2006, helping to fuel a worldwide spurt in manufacturing activity. Even the troubled commercial property market might be about to leave the intensive-care unit: in the last quarter of 2010 businesses took up additional office space for the first time in three years, and rents began to recover. Only the jobs market remained weak -- don’t be misled by the reported dip in the unemployment rate from 9.8 percent in November to 9.4 percent last month. Experts say it is a statistical anomaly, and that the rate of job creation remains too low to recover the 8.5 million jobs lost during the recession any time soon.
Still, no more talk of double dips, much less of lost decades. Forecasters at Goldman Sachs predict the economy will grow this year at an annual rate of 3.4 percent this year and 3.8 percent in 2012, which is in line with the guesses of other forecasters. Some of this growth, points out John Makin, an economist at the American Enterprise Institute, is due to the $88 billion boost to disposable income provided by the payroll tax cut included in Stimulus 2, negotiated between the Obama administration and the lame-duck Congress before the president packed his bags for a family break in Hawaii and the lame ducks scurried home to seek their livelihoods in the private sector.
But risks lurk. One such is overheating, to which economists are now assigning twice as high a probability (20 percent) as of another slowdown (10 percent). Fed-watchers worry that the Federal Reserve Board, quick off the mark to head off a downturn, might be slower to implement its exit strategy, leaving the U.S. economy subject to higher inflation and an investor-led, growth-cutting rise in long-term interest rates. Fed chairman Ben Bernanke discomforted them by telling Congress yesterday that even the improved economic picture has not shaken his determination to continue printing money, primarily because he expects unemployment to remain close to 8 percent through the end of 2012.
The threat of inflation is magnified by soaring commodity prices, mitigated only slightly be recent dips. High demand from Asian and other developing countries is driving up the prices of food (now at a record), clothing (cotton is up), and just about everything that contains copper or other minerals.
Most worrisome is the price of oil. Analysts at Sanford C. Bernstein & Co. forecast that crude prices would average $80 per barrel last year: in the event, the figure came in at $79.60. They now say that 2011 will see prices average $90 per barrel. OPEC has sufficient spare production capacity to accommodate the projected 1.7 percent increase in demand this year, but Iran and Kuwait, key OPEC members, deny that $90 or even $100 oil will have a negative impact on the global economy, and will resist increasing supply. If higher crude prices translate into much higher petrol prices, now around $3 per gallon but headed to $4 or even $5 if some unforeseen bottleneck develops, retailers might find that this added cost, the equivalent of a $70 billion tax on consumers, weakens demand for most of the stuff on their shelves.
Bernanke told congress that his data shows that “consumer price inflation [is] continuing to trend downward.” It seems that he neither eats, nor drives, nor buys clothes.
Another worry is the impact on financial markets of the continued failure of the leaders of the eurozone to come to grips with the inability of Greece, Ireland, Portugal and Spain to pay their debts. If their eurozone partners don’t develop a mechanism to assure markets the disease will be contained, the infection will spread to the international banking sector. The hope is that the powers-that-be in Europe will ignore French president Nikolas Sarkozy’s call to spend time figuring out how to use the G20, of which he is this year’s chairman, to replace the dollar as the world’s reserve currency, and instead follow the advice of UK chancellor of the exchequer George Osborne to “stand more convincingly behind the euro,” reform labor markets, get the deficits under control, and strengthen Europe’s shaky banking system. Like Britain, a non-eurozone country, America has a stake in the stability of that 17-country bloc.
Then there is the possibility that our politicians will focus their eyes on the 2012 presidential elections rather than on the burgeoning deficit. Things looked brighter at year-end than they do now. President Obama, buoyed by gains in the lame-duck session of Congress, is working hard to antagonize Republicans by making recess appointments they find offensive and having his regulation-writers revive federally funded doctor consultation concerning pulling tubes and plugs on very ill patients. On the other side, the Tea Partiers who have come to town are pledged to let the nation default on its IOUs when it hits the debt ceiling unless the president agrees to substantial spending cuts. This demise of bipartisanship matters mightily since it will take a bipartisan deal to bring the deficit, now adding $100 billion per month to America’s debt mountain, under control. Perhaps reports of the death of bipartisanship are premature. Let’s hope so.
Finally, there are so many possible conflagrations that it is almost Panglossian to assume none will light the skies in 2011. The Iranians are poised to get the nuclear weapon with which to excise what they call “the Israeli cancer” from the Middle East, and the Israelis are determined to prevent that from happening or to retaliate in kind. The North Koreans might underestimate the new determination of the South Koreans not to be bullied. Islamic terrorists might gain control of the Saudi oil fields, or Pakistan’s nuclear facilities. Conjure your own horror – any one would make hash of current economic predications.
So enjoy the new, cheerier economic news, at least for now, but avoid joining the euphoric herd. Remember, these forecasts are not very different from the forecasts made at the beginning of 2010. And they proved to be wishful thinking.
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