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Spring Swoon

12:00 AM, Apr 27, 2013 • By IRWIN M. STELZER
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The U.S. economy grew at an annual rate of 2.5 percent in the first quarter, well ahead of the paltry 0.4 percent in the final quarter of 2012. Consumer spending led the way, increasing at a rate of 3.2 percent. But leave the champagne on ice for now. Consumer outlays were boosted by involuntary spending on fuel during an unusually cold winter, and by one-time spending of the dividends that were paid out at the very end of last year rather than in 2013, when dividend income became subject to higher taxes.

Cartoon of Bernanke On Sinking Ship

Gary Locke

Worse, it seems that consumers began reining in their spending in February and March, and consumer sentiment declined this month from the March level. When they realized that the payroll tax increase effective at the beginning of the year was taking 2 percent out of their weekly or monthly pay checks, they decided to take a pass on some of the offerings in Walmart, McDonald’s, and other stores that cater to less affluent shoppers. Meanwhile, families with annual incomes in excess of $250,000 can’t help noticing that Obama has taken aim at their dividend checks, has loaded a new Obamacare tax on them, and is now calling for an increase in the rate they pay on their ordinary income. The final straw is the realization that Obamacare is driving up health insurance premiums, dictating prudence when in the malls.

A 2 percent payroll tax increase might not sound like a lot, but along with the increase in taxes resulting from the expiration of the Bush tax cuts, which President Obama insisted on for families earning more than $450,000, it yanked $150 billion out of consumers’ pockets. Economists estimate that this self-inflicted wound will cut a full percentage point off this year’s growth.

There is real irony here. Republicans agreed to increase the tax raid on paychecks of workers while opposing the President’s proposal for higher taxes on millionaires. They were joined by Democrats who profess to be champions of the middle class, the very people hit hardest by this latest squeeze on their take-home pay.

Not all of what pundits call the “spring swoon,” the third successive April slowdown, can be blamed on the bipartisan decision to raise taxes. The world is indeed with us, not late and soon, but right now. The eurozone economy is contracting, and German finance minister Wolfgang Schäuble warns, “No one should think that Europe will deliver high growth rates in the coming years.” Unlike the American, Japanese, UK, and other central banks, the European Central Bank is refusing to print money lest it antagonize Europe’s paymaster-in-chief, German chancellor Angela Merkel. Although debt and unemployment levels in countries under the German-imposed austerity lash are soaring, Merkel remains unpersuaded by U.S. Treasury Secretary Jack Lew, IMF chief Christine Lagarde, European Commission president José Manuel Barroso, and others who are calling on her to ease up on austerity to stimulate growth and avoid a social upheaval in countries where half of young people have no work. They fear that austerity might bite in ways not anticipated by its promulgator.

Merkel’s problem is that what is good for Germany, which just upped its growth forecast, might not be good for the rest of Europe. Her public acknowledgement that although other countries need a reduction in interest rates, Germany could use an increase if its growing economy is not to overheat, is taken as hint to the ECB that she just might abide a tiny cut in interest rates at Thursday’s meeting of the ECB’s governing council. The betting is that the Bank will use this dispensation to drop rates even though it is reluctant to seem to endorse Barosso’s view that “austerity has reached its limits.”

The problems in the eurozone are depressing U.S. exports, which until now have been one of the drivers of the economic recovery: GE’s industrial sales to Europe are down 17 percent. And the fall in China’s growth rate—to 7.7 percent—is cutting its demand for commodities, which in turn is causing a drop-off in American-made mining machinery: Caterpillar reports that first-quarter sales in the Asia-Pacific region were down 24 percent. The effect of Japan’s devaluation of the yen has yet to be felt by American exporters.

All of which has produced the talk of another “spring swoon.” Economists at the International Monetary Fund, in the latest iteration of their forecasts, are now guessing that the U.S. economy will not even achieve a 2 percent growth rate this year: 3 percent will have to wait until 2014. The IMF, led by managing director Christine Lagarde, has launched an attack on austerity, a fiscal tightening that is creating real problems in the eurozone. So it’s lowering of the outlook for the U.S. economy reflects its view that  America is “tightening … policies at a pace that is too strong.” That fits nicely with the Obama plea for more another round of infrastructure spending but, says American Enterprise Institute economist John Makin, the IMF analysis “is badly muddled.”   

But be of good cheer, or at least better cheer. The consensus among economists here is that IMF bunch and other swoon-mongers have it wrong. A panel of economists regularly surveyed by the Wall Street Journal is predicting that the economy will grow this year at a 2.5 percent rate, sustaining the first quarter pace, rather than swooning. That would bring full-year 2013 growth to the fastest pace since 2005, despite the fiscal tightening that is resulting from the combination of tax increases and spending cuts. The panel then expects the rate of growth to accelerate to 2.9 percent and then to 3 percent in the following two years.

My own sense is that the home-town boys have a better chance of being right than do the IMF economists. The revolution in energy availability and low natural gas prices resulting from fracking technology are attracting manufacturing businesses to the U.S. and, although that sector will never be as large as it once was, it will likely no longer exert a major downward pull on economic growth. The auto boom seems certain to continue as consumers, scrimping on other things, continue to replace their ageing vehicles with newer, more efficient, more technologically advanced cars and trucks.

And the housing recovery proceeds apace. My admittedly unscientific survey of property agents indicates that the March fall in sales of existing homes was due more to a lack of inventory of homes to sell than to demand for these homes. In response to the lack of inventory, home builders are scrambling to augment supply: newly built homes for sale jumped in March to the highest level since late 2011. And sales of new homes in March were up 18.5 percent over year-earlier levels, with prices up 3 percent in March alone by one reckoning. Home builders are complaining of difficulty in hiring skilled construction workers, and of rising costs of building materials and land—hardly signs of inadequate demand. 

With Federal Reserve Board chairman Ben Bernanke and his colleagues administering the smelling salts of record-low interest rates, autos and houses should help the economy to snap out of its swoon.

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