Pity the poor economist trying to create a coherent picture of the U.S. economy from the bits and pieces of the data jigsaw puzzle, the most recent piece of which was Friday’s jobs report. Non-farm payrolls were up 192,000 in February, and the estimates of the previous two months’ jobs growth were revised upward by a total of 58,000 jobs. The gains in the private sector, 222,000 jobs, offset 30,000 job cuts by cash-strapped state and local governments. The unemployment rate fell for the third straight month to a two-year low of 8.9 percent. Gains in the private sector were pretty much across-the-board, with the manufacturing, construction, and service sectors all recording job growth.
Which might explain why consumer confidence is at its highest level since February 2008, driven in part by a perception, and a correct one, that the job market is improving, and in part by a spate of good news. The Institute for Supply Management (ISM) manufacturing index in February was at its highest level since May 2004. The Federal Reserve Board’s survey of business conditions, the so-called Beige Book, turned up “solid growth in manufacturing production” in all districts save one.
Retail sales are also on the rise. Moderate-priced chains Macy’s, Kohl’s, and J.C. Penny reported that stores open for one year saw growth of 5.8 percent, 5 percent and 6.4 percent, respectively over February 2010 sales. Higher-priced chains did even better: Saks’s sales rose 15 percent, and Nordstrom’s 7.3 percent.
The auto industry is enjoying what can be described as a boom. GM reported total sales in February exceeded year-earlier levels by 49 percent, Toyota sales were up 42 percent, Ford’s by 14 percent. It seems that the need to replace vehicles after a long period of making do, plus rising prices for used cars and the increased availability of financing, drove buyers to the sales rooms. Dealers are delighted that they no longer sit on glutted inventories of vehicles.
Hold the applause. The jobs market has not recovered quite as much as a first look at the data suggests. The labor force participation rate is at its lowest level in 27 years, the number of workers involuntarily working only part-time is stuck at 8.3 million, the number unemployed for more than six months remains at six million, and the number not counted among the unemployed because they have stopped looking for work actually rose from 2.5 million a year ago to 2.7 million. And Federal Reserve Board chairman Ben Bernanke says the unemployment rate will still be an elevated 7.5 percent to 8 percent in 2012.
Equally important, both hourly compensation and no increase in hours worked “does create a longer term challenge to aggregate demand” notes the latest memorandum from the Lindsey Group. A Bloomberg report contends that the jobs being created pay a lot less than those that have been lost, and echoes the Lindsey view, “The good jobs that would trigger a solid boost in spending just don’t seem to be there.” At least not now. With workers eager for jobs, they are willing to take pay cuts to get back to work, or into some job for which they have no special skill.
Nor is the level of economic activity quite what it seems on the surface. For one thing, business spending on new capital equipment fell by almost 7 percent in January, suggesting that businesses are not responding to President Obama’s charm offensive by drawing down the $2 trillion cash piles they are hoarding. For another, one robin does not make a spring. Arnold Aronson, managing director at retail consultants Kurt Salmon, points out that February sales are not “a firm confirmation” that cash registers will keep ringing – actually, credit card machines will keep swiping – for the rest of the year. Retailers are “still dealing with … high unemployment, high gas-pump prices and … the higher prices that will be passed on to consumers because of rising costs for cotton and other raw materials,” Aronson points out.
Finally, there is the not so small matter of the deficit. Republicans want to cut it, and so do Democrats, but in the case of the latter, not just yet, or at least not by as much. Goldman Sachs economist Alec Phillips calculates that the $61 billion in spending cuts demanded by Republicans would reduce economic growth by 1.5-2 percentage points in the second and third quarters, and Democratic advisers talk of the loss of hundreds of thousands of jobs if the cuts the Tea Partiers are brewing actually get served up.
As if that were not enough to have many politicians take flight, we are in the midst of a serious outbreak of schizophrenia. Voters are demanding that the federal government bring the deficit under control, and have sent a large contingent of new congressmen with a mandate to cut spending. But 75 percent with a view on the subject say it isn’t necessary to cut Medicare, and 70 percent say cuts in Social Security are not necessary. Those programs account for about 60 percent of the budget. Exempt them from cuts, and eliminating the deficit becomes a virtual impossibility. The search for heroes willing to propose cuts in these programs has so far proved unavailing, although Paul Ryan is promising to lead the attack on the deficit.
With massive deficits, loose monetary policy, and oil price rises making the headlines, it is little wonder that inflationary expectations are at their highest level since May 2008, especially since Bernanke told Congress he worries more that the rise in oil prices will slow growth more than it will trigger inflation. He is probably right, if past experience with oil spikes is any guide, but his critics see this as one more proof that he is soft on inflation, the other being his refusal to put QE2, his second quantitative easing program, in dry dock now that the economy is recovering.
Here is a stab at fitting these pieces of the puzzle together to form a coherent picture. Rising sales and production, and an improving labor market suggest that the U.S. economic recovery is on track, although moving along that track more slowly than many, especially politicians with an eye on next year’s elections, would like. The recent rise in oil prices is likely to be with us long after the Libyan problem is resolved because of fears that some more significant domino might be the next to fall. That might slow the recovery a bit, but is unlikely to derail it. Nevertheless, a slowly recovering economy, moving ahead at, say, 3.5 percent, is unlikely to create enough jobs to bring the unemployment rate down quickly, especially since the long-term unemployed will have difficulty retraining and re-entering the work force.
On the political front, current indications to the contrary, progress will be made in bringing government spending down, witness the fact that the serious debate is now what to cut, rather than whether to launch major new spending programs, the subject of debate only a few months ago. But a final attack on the deficit will have to wait until after the 2012 elections. A reelected Barak Obama, with nothing to lose and a favorable legacy to gain, or a new man on a honeymoon with a pocketful of political capital, just might be able to do what needs doing.