The 2 Percent Solution Isn't One
12:00 AM, Jul 7, 2012 • By IRWIN M. STELZER
Two percent is no solution. That’s the growth rate chalked up by the U.S. economy in the first quarter (1.9 percent for those who believe in the precision with which GDP is measured) and that most forecasters see in America’s near-term future. Macroeconomic Advisers is not alone in lowering its forecast for this year’s growth, from 2.4 percent, which it expected a few months ago, to 2.1 percent. That won’t do much to bring down unemployment, or to persuade businesses to worry less and invest more, or to prize a few extra dollars from consumers to send their kiddies back to school in style. Which adds to gloom created by forest fires in the West, destructive storms in the East that have left millions without electricity, 100-degree heat in many parts of the country, and a Fourth of July holiday that fell on a Wednesday, eliminating the possibility of stretching the celebration of our independence into the long weekends that are created when the holiday falls on any other weekday.
Worst of all, the second quarter was the worst for job creation in two years. Only some 80,000 jobs were added in June, the unemployment rate remained stuck at 8.2 percent, and the more meaningful rate (technically, U6), which includes workers too discouraged to continue looking for work and those involuntarily working short hours, ticked up to 14.9 percent. That means that over 23 million workers can’t find full time work. Some 5.4 million have been out of work for 27 weeks or longer, and millions more have dropped out of the labor force completely, bringing the share of the working-age population with jobs or looking for work to a 30-year low.
Most economists, who spent this week raising their forecasts, were embarrassed (assuming that hardened economic forecasters are capable of embarrassment), but not quite as much as President Obama (assuming politicians are capable of embarrassment), who now has to explain why his trillion dollar stimulus and massive deficits have failed to produce more than what International Monetary Fund managing director Christine Lagarde describes as a “tepid” recovery. And even that is likely to morph into a recession, Lagarde warns, if we don’t avoid the “fiscal cliff” towards which the country is headed unless current legislation calling for a massive tax increase and sharp spending cuts is amended, and if Congress does not “promptly” raise the debt ceiling to avoid spooking financial markets.
Fortunately for the president, he ranks among history’s better campaigners. Although about two million jobs have disappeared on his watch, and the unemployment rate has risen from 6.8 percent to 8.2 percent, he has managed to paint Mitt Romney as the cause of workers’ woes. Using waves of television ads in key swing states, Obama has successfully labeled the former head of Bain Capital the “job outsourcer in chief.” The inability of the Romney camp to fashion a response has political observers wondering how long the campaign will stick with a strategy of saying little of substance while banking on Obama’s poor economic record to get the moving vans loading up at the White House early next year.
Alan Krueger, chairman of the president’s Council of Economic Advisers, took to financial news channels immediately after today’s jobs report to point out that 4.4 million private sector jobs have been added in the past 28 months, proving “the president has the right medicine for the economy”—more infrastructure spending and more money to states to hire teachers and fire-fighters. In effect, damn the deficits, full spending ahead.
There is little doubt the economy is not moving forward at a pace that is likely to whittle down the unemployment rate soon, or by very much. In June, the factory sector contracted for the first time in three years, according to the Institute for Supply Management surveys. Exports, which have been an important source of growth, continued to grow, but at a slower rate. Europe’s recession and a weakening euro (now at around a two-year low) that makes American goods more expensive in Europe are combining to reduce demand for made in U.S.A. products. Ford and Harley-Davidson, among other companies, report significant drops in sales in Europe, and Caterpillar’s formally robust growth in Europe, Africa, and the Middle East now fits Lagarde’s description—tepid—although the company nevertheless predicts record earnings for the year. Analysts are expecting falling overseas sales to cause drops of around 25 percent in the second-quarter earnings of Ford and GM, with some predicting the GM drop will come to as much as 45 percent. Meanwhile, with growth in China slowing, Nike and other firms that have a significant presence in that market are hurting: Orders for future delivery of Nike products are running about 2 percent above last year’s rate, compared with recent growth of 20 percent.
Closer to home, much depends on two things: the willingness of consumers to spend, and the willingness of businesses to invest. Although wages seem to be rising, consumers, who account for 70 percent of the entire economy, are cautious. A weak jobs market, widespread press coverage of Europe’s problems, the slowdown in China, Iran’s refusal to halt its nuclear weapons program, and political deadlock here have brought consumer confidence down to its lowest level this year. Retail sales at the 18 chains tallied by Thomson Reuters did rise in June, but only be 2.5 percent, the slowest pace since November 2009. (Necessities did better: sales at Limited’s Victoria’s Secret were up 7 percent.) But gasoline prices are down, and average hourly earnings and hours worked by those with jobs are up, perhaps signaling an improvement in consumers’ circumstances in coming months.
Meanwhile, businesses continue to sit on their cash—$1.74 trillion in liquid assets at last count. With profits under pressure, Europe in recession and China struggling to regain its past growth rate, our economy headed towards a fiscal cliff, the fortunes of pro-business candidate Mitt Romney waning, health care costs likely to soar now that Obamacare has been declared constitutional, wait-and-see is the corporate and small business order of the day.
The only good news comes from the auto and housing sectors. Domestic vehicle sales in June topped last year’s total by 22 percent, as consumers continue to replace a fleet that is about ten years old. As for housing, prices are up, sales are up, rents are high and rising, builders are more active, and interest rates on long-term fixed rate mortgages are around 3.6 percent, the lowest since such mortgages were first offered in the 1950s.
Still, the bad news trumps the good, leading to calls for the Federal Reserve Board to follow its UK, Chinese, and European colleagues and start another round of monetary easing. Don’t bet on it just yet. Fed chairman Ben Bernanke is not a “ready, fire, aim” kind of guy.
Recent Blog Posts