Chugging Along
Amid all the political drama the economy keeps on chugging. No great acceleration. No great slow down. Not enough to break the back of unemployment, but not bad either. Ho hum.
Take today’s news on first time claims for unemployment assistance. They rose unexpectedly back above the magical 400,000 level all the way to 412,000. This is not good. Then again perhaps it is meaningless. The end of quarter numbers are frequently distorted – although I have never truly figured out why – and so there is a better than even chance this is simply an aberration. The sobering part of the report is not so much this spike back up, but that there is no sign anywhere of a surge in hiring. Businesses have taken cost cutting to such an extreme that they have strangled the golden goose somewhat. By reducing costs, and by implication headcount, to such a degree, they have drained demand from the economy. That lack of demand shows up as slow sales, which encourages further cost cutting. Even when things start to pick up, as they now are, businesses are coy about re-hiring. They fear another slow down. Which, of course, they risk causing by not hiring. And so it goes.
In the absence of strong government action this is the kind of economy we all will have to get used to. Limping along, and susceptible to the odd setback.
In this context this week’s news that retail sales dropped back a bit is a sign that the weight of poor employment prospects and continued real estate woes is dampening activity down. Add in the recent spike in prices – which I consider temporary rather than permanent – and we have the makings of a slow summer. It is never easy to tease apart the message from the data and March’s retail sales growth of only 0.4% is a good example of the problem. This growth was sharply down from February’s 1.1% and so is disappointing. But the news is mixed. Much of the slowdown was caused by a drop in auto sales, which was expected given the rapid rate of growth in the past few months. This was offset by an increase in gasoline purchasing amongst other things. This uptick in gas consumption was partly due, not to volume growth, but to the sharp increases in price. Is this a good thing? Or a bad thing? You see what I mean. Obviously measures in real terms like greater volumes consumed are a sign of quickening GDP activity. The fluff on top caused by rising prices can distract from the underlying message.
When we pick it all apart it looks very much as if the economy is beginning to flatten out a little. What acceleration we saw late last year is past us and we are settling down into a steady state. So we can start to assess the ramifications for policy making.
The Administration seems to think we are now firmly out of the woods and that the economy is robust enough for the policy focus to shift from short term recovery operations towards long term stability concerns. Hence the sudden activity around the deficit. I, for one, am not convinced by this, since the pattern of growth looks suspiciously like a Japan style stagnation with growth insufficient to absorb our idle resources or to encourage a bout of new investment. So we are half not whole recovered. And that makes a big difference when it comes to deficit cutting.
Set aside the question of whether we need to cut the deficit. I say it is premature. But the received wisdom is that it is now time to address the long term issues in the budget. The point is simple to make: any cuts, or any tax increases, will slow the economy down from its current rate of growth. This is not controversial unless you believe in the more extreme versions of supply side voodoo. Since we are about to slow the rate of GDP growth deliberately we all ought to be happy about the degrees of freedom we have for such action. In my book we have very little room for error. The Administration seems to think we have more. And the Republicans don’t care too much anyway – they are driven by ideological objections to government spending rather than economic concerns.
The big question is: will the shock we are about to deliver be enough to throw us into reverse?
Given this week’s tepid news I am worried that it might be. That would be more than unfortunate. It would be downright horrible. It would slow down even more our ability to cure the damage the bankers did to us all and would mean prolonging the hardship of millions of workers currently unable to find a job. There are times when politicians really can screw things up. This is one of those times.Which is why we all need to be involved in whatever passes or debate in Washington.
I know that’s difficult to do. But remember: we are only chugging. Were we humming along we could ignore the politicians. They could do damage, but it wouldn’t hurt too much. Now is a time to pay attention.
