Slow Start to 2011?
Today’s news is a less upbeat than I had expected. Not that I had great expectations to begin with. Personal incomes rose 1.0% in January and personal consumption rose with it, but by a much smaller 0.2%. The problem is that the income figure is derived mostly from the payroll tax cut Obama managed to get through Congress, rather from wages. So it gives us a false view of the underlying health of the economy. And when we adjust that consumption figure for inflation we end up with a decrease of -0.1% rather than an increase. There is no way around it: US consumers are off to a slow start this year.
This will have an impact on GDP along the way unless they suddenly reverse course and start spending that tax cut. The savings rate rose from 5.4% in December to 5.8% in January as households took their payroll tax cut and sat on it. This should be of no surprise to anyone since it is well known that tax cuts are not very reliable stimulus vehicles. Still it seems a lesson too many people forget.
Buried in the same report was an insight into inflation. The personal consumption price index is released along with the income and expenditure information and shows that prices increased 0.3% in January, which is the same as December and up only 1.2% over that last year. Meanwhile the core PCE index – which strips out food and energy costs because they tend to bounce about unpredictably – rose only 0.1% in January and only 0.8% over the last year. In other words there is still no sign of inflation looming, and no pressure at all on the basic trend sufficient to call for a reaction from the Fed.
One last piece of news reinforcing the notion of a slower start to the year is the report of pending home sales which fell 2.8% in January, making it two months of decline in a row after several months of improvement late last year. Perhaps the biggest news in the report was a radical downward revision to December’s figure. Originally it had shown an increase of 2.0%, but has now been slashed to a 3.2% decline. Overall pending home sales are about 1.0% down on this time last year having collapsed mid year only to climb almost all the way back.
What to make of all this?
Taking this data along with last week’s downward revision to the fourth quarter GDP numbers, I think we can conclude 2011 will not see a surge in growth at all. More likely we will end up with a decent, but not great, year – somewhere in the range of 3.0% GDP growth. A great deal hangs on consumption pulling back up from its slightly tepid January pace. And, clearly, the roiling state fiscal crisis will only make things worse. For every cut at the state budget level we can subtract from overall growth as wages are lost and thus demand is drained away. Given the gathering austerity frenzy it is quite possible to argue for a much lower GDP outlook – maybe in the 2.0% range. On top of that, near term price problems in both food and energy could dampen things as well. So the picture is not as upbeat as it looked just a few weeks ago. Having said that other analysts are sticking with their rosy vision with some predicting growth nearer 4.0%. Quite how they get there I cannot say, especially given the ineffectiveness of the payroll tax cut as a stimulus and those potential price shocks. They never learn.
Finally no one that I know of thinks unemployment will reduce much this year. If we get below 9.0% and stay there that will be a success in these conditions.
That represents a failure of policy in my mind, but our leaders have moved on to other matters.
Perhaps they’re tired of thinking about jobs. It certainly looks that way.
