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Some Economic Cheer, Some Worries

12:00 AM, Jan 8, 2011 • By IRWIN M. STELZER
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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. 

Some Economic Cheer, Some Worries

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.

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