Good Stuff? And The GOP Plan To Cut Jobs

There are a few interesting pieces of news to report today. My take on them is a little different, so here goes:

Manufacturing

We heard today that the Institute of Supply Management’s index of manufacturing activity rose yet again. It reached 61.4% in February, up from 60.8% in January, and is now at its highest level since 2004. This makes nineteen straight months of increase. Evidently things are looking good in our factories. Heck, they even added jobs consistently during 2010 making it the first year since 1997 when more factory jobs were added than lost. The only down note in the report is the news – actually not news at all – that raw material prices are rising right across industry and are putting some pressure on margins.

Even my perpetually sour outlook has to welcome this news. Except, of course, that it means little in general terms unless those employment figures accelerate much more quickly. Having busier factories on the back of extra overtime and only slight job gains does little to improve anything but profits.

Bernanke

Ben was chipper today as well. He fended off criticism of Fed monetary policy by arguing that any current inflation increases are likely to be temporary and are not a function of Fed activity, but reflect growth in demand overseas and political instability in the Middle East. While I am not a huge Bernanke fan, I have to agree with him on this. Inflation has picked up slightly, as we would expect when the economy awakens from its slumber, but there is enough slack in the system and no sign of rapid wage increases, so the long term trend is still very flat. This probably disappoints those whose ideology requires them to see inflationary ghosts under every Fed policy bed, but those folks are not driven by facts anyway. This is not to say that short term risks are not a worry: obviously ongoing turmoil in the Middle East is causing oil prices to jump around, and raw material costs are rising worldwide as demand grows. Plus food supplies are tight. Take all these together and the near term inflation outlook is for it to rise. But that is not a cause for the Fed to react by raising rates; and it also likely to abate later in the year as [if] things settle down again.

Construction Spending

There’s not much we can say: construction spending continues to tank. It fell 0.7% in January, which was much worse than expected – some had thought it would stay flat – but at least December’s dismal decline of -2.5% has now been revised to a less awful -1.6%. For these things we give thanks.

So what do we make of this?

Consistent with yesterday’s story I think these reports tell us the economy is chugging along at a decent enough pace. 2011 will definitely be a year of solid growth. The problem remains the enormous imbalance in the job market and the yawning inequality that is weighing down on our ability to accelerate. As long as the rewards of growth are asymmetrically channeled to the advantage of a small number of privileged people, and not broadly spread across all groups, spending and investment will reflect the median and not the mean increase. The intense clustering of wealth at one end of the economic spectrum deprives us of power to propel growth. The average may look great, but since most households are not sharing in that growth, the recovery will be slower to gain traction. Indeed it may well falter before it has healed the employment problem at all.

Which is why the current wave of anti-union activity or sentiment is so important. To the extent workers are deprived of their ability to extract wage increases from productivity gains through collective bargaining – which merely offsets the existent asymmetries in the workplace and does not introduce them – we can expect the scenario I just described to persist or worsen. Too many people seem to have forgotten how important the unions were in the creation of the middle class. Perhaps that is a sign of the union’s success and the complacency that resulted from that success. But it is indisputable that workers have not shared in the productivity boom of the last few years. Profits have garnered an historically large share.

Meanwhile, the Republicans are up in arms over the recent issue of several analyses of their budget cuts, all of which conclude those cuts will both slow the economy and cost jobs. I don’t see how anyone could argue otherwise. Cutting costs from government implies cutting demand and reducing government payrolls. That’s it. Plain and simple. The impact of the current set of budget cuts proposed by the GOP seems to be to reduce GDP by a minimum of 0.3% this year and 0.2% in 2012. It may be more. The cuts could also cost about 700,00o jobs over the next two years. Since the economy is creating a paltry 80,000 to 90,000 jobs a month, I will leave you to draw your own conclusions. The Republicans are busy undoing all the good work of the stimulus. Since they never believed in the stimulus I suppose they are blind to both its great success – just confirmed yet again by the Congressional Budget Office – and the negative effects of their policies.

Thank goodness the economy is growing fast enough to keep up a recovery despite their efforts. How long it can withstand the assault I don’t know. Bernanke was very evasive today when asked his opinion on the GOP cuts. Then again he’s a Republican. Even though they hate him.

Poor Ben. Stuck in the middle again.