The Blog

The U.S. Recovery Bucks International Headwinds

12:00 AM, Apr 2, 2011 • By IRWIN M. STELZER
Widget tooltip
Single Page Print Larger Text Smaller Text Alerts

The jobs market continues to improve: 200,000 jobs were added in March. Corporate profits are exceeding forecasts for about three out of four firms, and the quarter that ended yesterday is the best first quarter for stocks in twelve years. Real consumer spending (adjusting for inflation) is up a bit, and researchers at State Street Global markets report that their index of investor confidence is up, with investors in North American the cheeriest of all. Better still, there is talk in Washington that the politicians are now serious about agreeing to spending cuts for this fiscal year, and to a longer-term combination of plans to rein in deficit spending. That would help to halt the decline in the dollar.

Wall Street

Unfortunately, that’s only part of the picture. Home sales remain over 9 percent below the level in 2010, even after a bit of improvement in February. Four million unsold homes overhang the market, and four out of every ten homes sold were put on the market by owners who could not pay the mortgage, or decided that the value of the home was so far below the mortgage that it paid to send jingle mail to the bank—an envelope containing the keys and a note, saying, “It’s all yours.” No surprise that prices continue to drop.

All of this matters so much because the effect of these woes is not confined to the housing industry. Home values make up an important part of total personal assets, and a depressed housing market has a negative wealth effect, cuts into spending, and has an outsized effect on consumers’ outlook.

Just as gasoline prices have an outsized effect on consumers’ perceptions of the level of inflation. Gasoline is a repetitive purchase; you watch the dials on the pump spin as you fill ‘er up; you see signs announcing rising prices as you drive to and from work and the mall; and you conclude that your income will be squeezed.

And you are right. Inflation is rising faster than incomes, leaving consumers worse off. Bill Simon, CEO of Walmart, the world’s largest retailer, says inflation is “going to be serious”: consumers will pay more for food, apparel, and most other items. The effect of the flood of dollars being turned out by the Federal Reserve Board, and rising wages in China and other Asian suppliers, are likely to hit consumers hard in coming months.

Developments beyond the control of U.S. policymakers are adding to a growing sense of unease. As HSBC Global Research put it in its latest update, “International developments create uncertainties for US outlook.” So the bank lowered its growth forecast and raised its guess at the inflation rate.

Periodic oil price spikes seem to have been replaced by an oil price plateau. Even when Libyan production is restored, oil company executives and traders will remain fearful of the increased risk of supply interruptions associated with popular uprisings and rumblings in oil producing countries. Higher risk means demands for higher returns, which in turn means higher prices, especially since it now seems that Saudi Arabia no longer holds sufficient excess capacity to provide as robust a buffer against shortages as it once did.

Add another factor to the oil price equation: bribes. No, not the sort we usually think of when discussing who gets drilling rights, and where. These are paid to the increasingly restive people who threaten the illiberal regimes that control the great bulk of the region’s oil production. The Saudi rulers have decided that it is a good idea to share some more of the revenues from the kingdom’s oil sales with the people whose money it really is, and have upped benefits of various sorts by about $130 billion. That means that for the Saudi budget to remain in balance, the oil price cannot go below about $85 per barrel now, or below $100 by 2015, according to estimates by the Institute for International Finance. If $100 turns out to be the Saudis’ new price floor, the good old days of $50, $60, and $70 oil will become grist for the mills of economic historians, and of no relevance to economic forecasters.

That would be less of a problem for the resilient, flexible U.S. economy but for two policies of the Obama administration. The first is to inhibit the development of domestic oil production, a process that pre-dated the offshore oil spill by BP. The second is to make the shift to other fossil fuels more costly. The administration seems to believe that the wind blows and the sun shines all of the time—and in places where consumers of electricity live—and is therefore placing its bets (well, taxpayers’ bets) on renewables that can at best provide energy on a sporadic basis. Meanwhile, the Environmental Protection Agency has just made it more costly to use coal, which is in abundant supply in America; environmental activists are unhappy with the effect of exploiting shale gas deposits, and nuclear power cannot expect a genuine renaissance so soon after the disaster in Japan. Until some form of carbon tax is imposed, the administration has license to continue to tinker with the energy sector, picking “winners” that in its view will reduce carbon emissions.

The fallout from Japan’s stricken nuclear plants further darkens the outlook. Vital links in the global supply chain have snapped, disrupting supplies of vital components, and causing the shutdown of auto factories and some manufacturers of electronic goods. In addition, Bloomberg estimates that over thirty large U.S. companies have been getting over 15 percent of their sales from Japan. Not now, and not soon.

Final proof that the world is too much with us comes from Europe. The European Banking Authority has launched a new round of bank stress tests. If properly done they will reveal that it is not only banks in troubled Greece, Ireland, and Portugal that are seriously undercapitalized. German banks are under-capitalized and are heavily laden with the IOUs of countries and companies that cannot pay them back. Britain’s regulators are demanding even thicker layers of capital than are needed to satisfy international regulators, while more relaxed regulators here in America are allowing banks to bite into their capital by paying dividends. Yes, it is Europe’s banks that are shakiest, but if we have learned anything in recent years it is that financial disasters somehow fail to respect borders.

So, one cheer for the jobs market, and a second for the politicians if they agree on a deficit-reduction package But hold the hooray in hip-hip-hooray until Japan recovers, the Middle East cauldron and U.S. inflation cool, and eurozone policymakers find ways not to add to America’s economic problems. 

Recent Blog Posts