Here We Go A-Wallowing
This is what floundering looks like. Well, perhaps I am being a bit harsh. After all we had a couple of good reports earlier this week, and today’s news on new claims for unemployment assistance is fairly decent. But the final revision of second quarter GDP and the durable goods data confirm that the economy is best described as being a doggie paddle swim rather than a free-stroke. There’s a lot of splashing but not a lot of movement.
The second quarter saw GDP rise a paltry annualized 1.3%. That’s nowhere near good enough to resolve our employment problems and leaves us very vulnerable to the twin impending crises of the Euro’s ongoing unravelling and our own self-inflicted budget impasse. We have precious few degrees of freedom which means that everything needs to go well – which I doubt they will – if we are to avoid even slower growth in upcoming quarters.
Recall that the last estimate for second quarter GDP was 1.7%, so the final tally represents more pessimistic view and confirms what we all felt about the midsummer: we became becalmed. This is especially downbeat because the two major factors contributing to the downward revision are exactly those we are hoping will drive us into a more rapid recovery. Personal consumption growth was revised down from 1.7% to 1.5%; and business investment growth was revised down from 4.2% to 3.6%. Since the other two components of GDP, trade and government spending, are both either relatively flat and/or highly dependent on the impending crises I mentioned earlier, we are dependent on the private sector to fuel the recovery. And the private sector is still wallowing in the aftermath of its bubble induced, debt retrenchment.
This is, of course, not news, but today’s news is a vivid reminder of how much work is yet to be done. No amount of political sharp talk can mask the failure of economic policy over the past decade – or more depending on how meticulous you want to be in tracing back the causes of our problems.
There is no point in re-hashing the discussion: we suffer from a lack of demand, and the longer we fail to address that issue the longer our wallowing will continue.
Today’s durable goods order report was decidedly different from most expectations. August’s 13.2% decline was much steeper than anyone predicted. It is, however, a very distorted number. Durable goods orders are highly volatile because they include some very large items such as aircraft orders and defense spending on capital goods. For instance, aircraft orders fell a whopping 102% in August alone because airlines had bunched their orders up during the Paris Air Show producing a spike up in July of 51%. Stripping out the effects of those two categories leaves us with a very different impression: the other categories actually grew slightly, at an annualized rate of 1.1%,reversing the declines of 5.2% in July and 2.7% in June.
I think it is fair to expect a slight pause in business investment, as illustrated in durable goods orders, while companies assess the likely damage to demand resulting from the upcoming, post-election, negotiations over the Federal budget. Failure to re-work the current arrangement would send us over the proverbial fiscal ‘cliff’ and by most accounts produce an immediate recession. Congressional failure to reach an agreement over the budget is injecting a level of uncertainty that inhibits growth. As you know, my opinion is that we ought to be augmenting not diminishing demand, but that is not the prevalent view in Washington where austerity in some form appears to be the more likely outcome. We are paying a heavy price for the impasse in Washington, and every quarter that goes by without a sensible long term budget in place adds to the pain.
Finally a little good news: today’s report on weekly claims for unemployment assistance was a modest step in the right direction. At 359,000 it was 26,000 down on the prior week and managed to produce a slight 4,000 improvement in its four week moving average. So that’s the good news. Unfortunately that four week average is almost spot on where it has lingered all year, and is woefully above a rate consistent with a rapid recovery in employment. While supporters of Obama will no doubt crow that this is much better than we saw at the depths of crisis – true – and is better than the record of the Bush administration -also true – it is nothing to be proud of. We are generating jobs at about the same rate the population is growing. That is insufficient and speaks to rotten economic policy in the face of a human crisis that everyone in Washington pays lip service to, but substantially ignores.
Of course it would help if economists could agree on what a good policy would be, but that, I fear, is a pipe dream. But, come to think of it, most economic theory is a pipe dream anyway, so why should we expect economists to be of value in fixing an economy?
Of that, another time.
