Wobbly numbers. wobbly US economy?
from Peter Radford
Just as we in the States enter the big debate over cutting the deficit we are getting a string of mixed signals about the US economy. It isn’t as robust as it should be, especially in view of the inevitable negative impact resulting from austerity measures. We don’t have a great deal of room to maneuver, which makes the task of cutting sensitive. Unfortunately sensitivity is in short supply. So I am concerned we may be about to shoot ourselves in the foot.
Let’s begin with the better news. The index of leading indicators rose 0.4% in March. I don’t usually focus on this index since it is simply an aggregation of other data, but it is widely used as a bellwether for activity, so we should note it’s continued rise. As usual the devil is in the details, and the problem hidden by the overall rise is the consumer confidence component. Expectations of improvement, as expressed by individual consumers, has taken a hit lately. This is largely due to the recent spike in food and fuel prices, but it also appears to be driven by nagging doubts about the strength of the recovery, and about how little what recovery we have experienced has seeped down into the lower reaches of the economy. Average people are still skeptical. Rightly so, given the very meager improvement in wages. The headlines and the media may be excited by the enormous profit gains being reported, but those numbers are meaningless unless they are translated into household level gains as well. Right now that is not happening either fast or sufficiently enough to turn the tide of expectations. On the contrary, the laggardly nature of employment improvement and the continued woes in real estate cast a pall over the near term.
Business may be booming. But so what?
Just how booming is more questionable after today’s release of the Philly Fed’s measure of manufacturing activity. The sudden drop in the index to a five month low of 18.5 in April, from March’s 43.4 caught us all by surprise. The drop may be partly explained by the fact that March’s reading was the highest since 1984, and thus may have been a distortion of reality that April countered. Even so, the drop seems sharp enough to cause concern. In particular the damage to the score coming from a 22 point drop in new orders should make us worry about the sustainability of our recent run of growth. I don’t think this signals an outright reversal, but what momentum was there may have vanished. We may have arrived early at the second phase of the recovery during which growth continues, but at a slower pace.
If so, this is not good news for employment. And that, in turn, will disrupt the political theater as we approach the next election.
On the employment front: today’s report on new claims for unemployment assistance was disappointing. You may recall that last week we saw a sudden jump in claims back beyond the 400,000 level analysts harp on a sign of returning health in the labor market. The excuse given last week was that there were statistical quirks in the end of first quarter data gathering that would unwind this week. Well not quite. Claims did drop, back to 400,000 from 413,000, but remain stubbornly high. My own rule of thumb is that we need claims to be down around the 325,000 mark before we can call the labor market robust. Obviously we are a long way from there. And progress is still annoyingly halting.
One last thing to bear in mind: the Fed is fast coming up to the end of its existing monetary easing program. Its QE2 series of asset purchases will end in a month and a half. That opens up the debate about what to do next. Should it continue with easy money? Or should it begin to tighten?
Naturally the hawks are circling and calling for an earlier tightening. They point to the spike in consumer prices as evidence that there is more inflationary bias in the economy than is healthy, and that, since growth is now assured, we should shift towards an anti-inflationary stance.
As you can tell from my earlier comments I am not so certain about the economy’s growth pattern. Further, my view is that inflation is only a surface phenomenon at present – wages are the real driver of long term inflation, and they are flat – and that austerity budgets will slow the economy from what already appears to be a weak path. Add this all together and there is no justification at all for a tightening. None.
Indeed if we look at the simple Taylor rule often used to indicate the target level of interest rates, we should be calling for substantial easing. The target rate at present is still negative at between -4% and -5%. Since we cannot get negative rates from our current position the only alternative would be to re-up and go for QE3. In the current political environment I doubt that will happen. So the best we can hope for is neutrality for the rest of this year and at least a postponement of a rate hike until next year. Maybe not even then. The irony, of course, in this discussion is that one way to get negative rates would be to allow inflation to rise so a close to zero nominal rate is turned into a sharply negative real rate. But the hawks want to go in the opposite direction. Why? To curtail the very inflation that would have helped. This is truly messed up policy making.
If this is the best scenario we can hope for we are in trouble. Why?
Because all those wobbly indicators, the persistence of high unemployment, a rotten real estate market, distortions in global inflation and trade balances, tightening fiscal policy, and now an end to easy monetary policy combine to suggest slower growth and rising risk.
This is, I am afraid, the price we pay for weakness in 2009/2010 when the opportunity for clear and bold policy was spurned for a muddle through approach on fiscal policy. When the inevitable fiscal burden of cleaning up the mess foisted on us all by the banks caught everyone’s attention, and started a panic – wrongly – over short term budget and debt problems, we were never going to be able to go back and take a second, better, shot at stimulus. Policy has taken on a patchwork texture since, with small side deals taking the place of grand, coordinated, head on attacks on our problems.
So timidity at the top, and a determination to preserve rather than reform the financial system, no matter how rotten it is, has led us into this sideways motion. Neither accelerating nor, yet, declining.
Today’s data confirm that this recovery is just not very strong.
For that, we have only ourselves to blame.