recession

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Stagnation Beckons

So. What is going on?

Today’s report on new claims for unemployment assistance looks good on the surface. It undoes some of the backwards motion of the last few weeks, and so arrests the decline. But it is nowhere near sufficient for us to claim that the jobs market is back on track. The 44,000 drop to a total of 434,000 is much better news, and reverses the terrible increases we saw in April, yet it adds to the confusion. Most analysts expected a bigger reversal and that the total would be even smaller. This expectation was based on a string of one off explanations for each of April’s poor numbers, which, when accumulated, would have been enough to get us back below the magic 400,000 mark. Even if we set aside my view that 400,000 is still poor and that a healthy labor market would have claims in the 325,000 or below region, the current pace of claims is still way too high to offer any strong encouragement. The labor market still sucks. Back in February we were at 375,000, and falling. That was a three year low. The perspective then was that the recovery was about to kick into a higher gear and thus we could shift our attention away from unemployment to ther issues like the deficit and inflation.

Or, rather, that was the establishment view.

I have disagreed with that idea throughout.

I do not see any lasting support in the data for the notion that the recovery is either strong enough, or deep enough, to eradicate the blight of unemployment any time soon. On the contrary, all I see is bumpy data, slow progress, and risks lurking in the shadows.

There is no question that unemployment remains our foremost task. Yet it attracts little attention. The media and our policy makers all were in a hurry to rush onward to a new agenda when the claims figures seemed to show gathering strength. They were glad to be rid of concerns about jobs, since fixing employment implies an argument over the extent of government intervention. Both sides of the political aisle had exhausted themselves over the last two years and the November election, with its overt punishment for economic failure, accelerated a desire by all concerned to be able to announce a victory over unemployment. So it was with great relief that the February improvement was greeted, prematurely in my mind, as a sure sign we could all move on.

I find this both frustrating and naive.

History tells us that recoveries from crises stemming from absurd finance and an implosion in banking are slow moving and fraught with risk of regression. With asset values thrown into doubt, balance sheets in need of repair, and credit suddenly hard to find, businesses and households withdraw to recoup. Banks, in their inestimable way, go through great cycles of over- and then under-extension of credit, and thus amplify the underlying business cycle. If the problem starts inside the banking or financial system, as this one did, then the feedback from the financial system into the real economy is even greater. As Minsky described it the problems all arise when underlying cash flows in the economy can no longer support the level of debt. When we reach such a point the values ascribed to that debt are no longer appropriate, and someone, somewhere, is sitting on an unrealized loss. When, as inevitably happens, an event triggers the need to make that loss visible, mayhem breaks out.

For a subsequent recovery to be both sustained and strong, asset values need to be re-establisehd at new and more realistic, lower, levels and cash flows need to be able to sustain the burden of debt within the economy.

We are still going through this adjustment phase. Especially in real estate. It looks as if there are similar problems in sovereign debt markets too – is all that Greek debt really worth a hundred cents on the dollar? I suspect that there are plenty of banks with unrealized losses still lurking in the weeds. So, despite the recent spate of bank profits, finance is not yet healthy.

Likewise the corporate sector is reporting huge profits, but it is not investing at the rate required to expand the economy sufficiently to draw down on unemployment. Why not? Expectations. Businesses report that their number one issue is lack of sales growth. Aggregate demand is still too soft to justify investment or expansion. So cost cutting and various book keeping tricks are the best sources of profit growth at the moment. But those things run out sooner or later. Sometime soon businesses need to see demand returning in order to make positive plans.

But, as this morning’s weak retail sales report shows, there is no sign of substantial demand growth. On the surface the numbers were fine. Not good. Just fine. Sales grew 0.5% in April, and the March figure was revised upwards to 0.9%. That upward revision to the March number may boost GDP when it is revised, but the April number is disappointing, especially when we adjust it for gasoline and auto sales. Without those sales it growth was negligible. If we also take into account the recent spike in inflation, it is easy to argue that demand growth is almost non-existent.

So businesses are likely to be very hesitant in hiring. This, of course, simply aggravates the poor outlook that households have, and so we enter another period of retrenchment or restricted demand.

Add in the cutbacks going on around the country at the state budget level, and the fact that Washington is seized by a bout of austerity fever, and it is very easy to build a case for stagnation rather than good growth.

We seem to have fallen into the same rut as Japan.

The signs are not encouraging.

I want to be wrong. I am not sure I am.

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What The … Where are the Jobs?

Quick question: when does a series of “special circumstances” become the norm?

The reason I ask is that today we heard bad news on the unemployment front. And, frankly, I am tired of being told that the recent string of reversals in the labor market are all just a sequence of disconnected oddities that mean nothing.

Here’s what happened: new claims for unemployment assistance jumped 43,000 to 474,000. That is ridiculous. We are back where we were last summer. All the steady improvement has been surrendered. There is something rotten beneath the surface that needs attention. Now, not sometime soon.

For a few weeks now the claims figures have been backtracking from the improving trend that set in late last year. For a short while, back then, we appeared to be heading in the right direction with claims even falling below the magic 400,000 level many people think represents the line between a bad economy and a decent one. We haven’t regressed back to ‘well and truly rotten’ territory, but we obviously are stuck somewhere in the middle. We are not making progress.

The string of weak reports has engendered something akin to a yawn amongst the high and mighty of the media and policy making. They are all obsessed with the newer and more interesting – in their minds – issues of inflation and debt levels. Jobs are just not high on the agenda at the moment. My guess is that they will be come the next election, when voters will be able to express their dissatisfaction with being left on the outside yet again.

This week’s special excuse is that we just had spring break in New York State where teachers and other state workers all sign on for unemployment for a single week, plus temporary lay-offs in the auto industry. This, they say, explains the latest jump.

Let me see. In February we had eked out sufficient gains to get the weekly claims number down to 375,000. We have given up 100,000 since then. All of it due to quirks? I think not. And why can a spring break figure distort the seasonally adjusted figures? I thought that the entire purpose of making seasonal adjustments was to eliminate the oddities that come along every year. Last I looked we have a spring each year, so why isn’t the spike in New York being smoothed away?

Something seems wrong.

The four week average, which should provide us some immunization against quirky weeks, has now risen by 22,250, back to 431,250, and is the highest since November.

Things are clearly going the wrong way.

Meanwhile, today’s report from ADP, the big payroll processing company, show that the private sector added 179,000 jobs last month. That’s down from March’s 207,000. In rough terms the economy needs to add about 125,000 new jobs each month to keep up with population growth, so April’s figure is very slightly on the good side of that bare minimum. But there is no way to characterize the current labor market as particularly healthy. Far from it.

We will get a better read on things tomorrow when the national employment figures are released, but at this point I doubt we will be very happy with what we hear.

So why is this ongoing malaise not worthy of headlines?

Politics and attention deficit disorder.

Our messed up politics prevents us from keeping our eye squarely on the employment problem. The half-hearted efforts back in 2009 were all we could manage. They cost us dearly, not in dollar terms so much as in emotional terms. The administration believes its own narrative that it fought hard for what it thought it could get. The stimulus we ended up with was insufficient, but just about enough to stop a full blown depression setting in. After that everyone shifted their attention to health care reform and fixing the banks. The energy expended on core economic policy moved from a fiscal approach towards a monetary approach. So all the efforts last year came from the Fed. Its famous QE2 being the centerpiece of stimulus throughout 2010. The public’s disgruntlement then spilled over into an election that pushed a right wing ant-stimulus agenda to the fore. The Republicans successfully used the deficit to frighten voters into viewing austerity as sensible policy. The temporary payroll tax agreement,viewed by supporters of the administration as a victory, is the only stimulative effort in 2011, and as of now there is no credible thinking going on to increase support to the economy. On the contrary, everyone now seems to think we are in strong enough shape that we can apply the brakes to slow down inflation and rein in debt.

I am not one of those people.

The economy is too weak for us to be considering anything other than continued stimulus.

We are not even talking about the most important subjects: jobs and inequality. Instead we are being given silly arguments about how demand is not the problem. We have, we are told, not a magneto problem to use Keynes word, but a structural problem. The magneto is fine. It’s just in the wrong car. What we need to do, apparently, is to get better workers. The ones we have are useless. They don’t match the jobs we have. What we have is a bunch of out-of-date blue collar workers who want good wages. What we need is a bunch of service industry types willing to work for next to nothing.

The long boom in high end incomes during the last thirty years was accompanied by an equally long stagnation for the bottom ninety percent. The bifurcation was remarkable. I happen to think that this separation accounts for much of our trouble. The redistribution of wealth upwards has left the mass of households unable to crank up spending. The traditional policy tools are thus blunted. The marginal kick delivered by stimulative efforts was too low, not just because the total was laughably small with respect to the gap in demand, but was muted additionally by the fact that most households have no second gear to shift into. They are firmly stuck in first gear – survival from pay check to pay check. Adding a few dollars via a tax cut does nothing to make a substantive or meaningful change to that week to week, or month to month, lifestyle. To the extent we have a structural problem in our economy the causation isn’t flowing outwards from a skills mismatch, it is flowing out of our unequal distribution of wealth. Fix that, and the engine starts to run more smoothly and is more responsive to policy.

Besides, if there is a structural skills issue, who is to blame?

Oonce upon a time firms used to spend heavily on training. Those programs fell victim to the national obsession with quarterly profits and stock prices. The modern management focus on shareholder value recast the cost of worker training from being an addition to an asset – worker skills being a form of capital – to pure cost. It could then be cut as part of the drive for profit. Short term this is fine. Long term it is a disaster. Slowly the pool of appropriate workers dries up and skill shortages emerge. Making this worse is that the private sector, by getting out of the worker education business, assumed that the public sector would provide the supply of needed skills education. It didn’t. Why? Because the same ideology that drove the shareholder value revolution in management theory, also drove an anti-government spending program in the public sector. Spending on worker skill development shriveled across the board. Everyone imagined that everyone else was training the worker of the future. So everyone imagined they could free ride on top of everyone else’s spending. This is a version of the classic tragedy of the commons. The free market fails. The public sector by trying to accommodate itself to a free market ideology, also fails.

So when people like Richard Florida prattle on about how we don’t have an aggregate demand problem, but that we have a structural skills problem, I get really vexed. Where he sees workers with old skills and unfit for modern work, I see workers abandoned by business and government alike and left to fend for themselves if they need to acquire new skills.

To the extent we have structural unemployment – and I am very far from being convinced we do – I see it as the natural convergence of predictable market failure derived from faulty corporate theory and a right wing shift away from a social focus in government policy. In other words the neglect was at the top, not at the worker level.

Which is why it has been so easy for our elite to move on to other topics. They see unemployment as a deep and intractable issue that will take years to solve. They see global workforce shifts and throw their hands up in despair. They say we are faced with a long slow adjustment where all rich economies, not just ours, will have to reorient themselves to tough new competitive conditions in the labor markets. If workers want to make those high wages they will have to shift to new, less globally exposed, lines of work. Meanwhile, the story goes … tough. We should toughen up and take our medicine. All you unemployed are simply victims of a shift in the world’s economy. Thus there’s not much anyone can do to help.

If they point out historic examples of similar shifts I will scream.

You see, their argument is vapor. It is a mask drawn over inequality.

Let me give you some history.

Great Britain, when it was leading the world into the industrial era suffered from skill shortages and was, simultaneously, a high wage economy. Those high wages, in the face of what was fast becoming a more interconnected economy, could have slowed growth down. They didn’t. Why? Partly because those high wages were in the context of rapidly rising productivity. High wages drove employers to substitute capital for labor. Yet unemployment stayed low because as workers were replaced by machines they were absorbed by the expansion in the economy caused by rising demand. The source of that demand being all those higher wages. This was a classic virtuous cycle. Wages were high yet did no harm. On the contrary, they fed demand and hence drove the need for more workers.

Why are we not seeing that here?

Our wages are high relative to China and other emerging economies, and our productivity, along with a weak currency, should help offset that. Indeed just today we learned that productivity rose 1.6% in the first quarter. But we also learned that real wages fell. The implication is that business is channeling the gains from productivity into shareholder profit and not into wages. Thus we have no virtuous cycle. Wages are left to stagnate. That limits the extent to which demand can rise. That, in turn, pushes the point at which business is forced to hire off into the future. All that productivity gain is coming from extended work weeks, not from capital substitution. This despite business having piles of spare cash to invest in capital if it wanted to. It doesn’t because its expectation is for weak sales.

We are stuck in a negative feedback loop, instead of the positive one I described that worked in Britain during the industrial revolution.

And, in my opinion, to jump from a negative to a positive loop we need to redistribute wealth so that the mass of households can shift gears.

That’s the discussion we should be having.

But we’re not. So our jobs market languishes.

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The Economy Slows Down

As we all thought, our economic growth slowed dramatically in the first quarter this year. The headline figure you will be reading about is 1.8% growth, down from the fourth quarter of last year when growth was 3.1%. What you will not be reading is the sneaky rounding up involved to get us to that 1.8%! To two decimal places growth was 1.75%. So being more accurate makes things appear a little worse. No big deal, but indicative of the efforts going in to make the headline look as good as possible.

Here’s the breakdown by major category:

  • Consumption 4Q 2010 .. +2.79%
  • Consumption 1Q 2011 .. +1.91%
  • Private Investment 4Q 2010 .. -2.61%
  • Private Investment 1Q 2011 .. +1.01%
  • Net Trade 4Q 2010 .. +3.27%
  • Net Trade 1Q 2011 .. -0.08%
  • Government Spending 4Q 2010 -0.34%
  • Government Spending 1Q 2011 -1.09%

These figures are what is called the “advanced” report and so will be subject to quite a bit of revision. Even so, it seems that the economy cooled off which could be cause for concern. Or perhaps not as long as the declines can be explained away as oddities unlikely to be repeated. The problem I have with these explanations based on “quirks” is that the economy is replete with such things. There are usually one or two odd numbers that appear to have “one-off” explanations. So there is always an element of forth masking the underlying trend. This is why forecasting the economy is more divination than science – despite all the high paid analysts in the media and at the investment banks.

With that in mind, let’s look at the data.

Obviously the key is personal consumption. It amounts to such a large percentage of the whole that any shift there can make the entire economy move. As you can see consumption faded strongly in the first quarter. One reason could be that bad weather kept people away from stores and that the decline will be offset this quarter as better weather sets in. Frankly there isn’t a great deal of more recent evidence to support that view. Retail sales have been decent, but not great at all. A different view is simply that households have pulled back a bit because unemployment has not improved significantly, home prices are still falling, wages are flat, and debts still need paying off. The accumulation of these factors outweighed the need to spend. hence the decline. I think we will experience this kind of stop-start activity for as long as consumer confidence is depressed. Even though April’s confidence figures showed a slight jump up, they are still not suggestive of strong spending.

The big shift from negative to positive in private investment could be interpreted as businesses preparing for expansion. That would be wrong. Recent durable goods numbers do suggest such a trend. But the first quarter investment turnaround was driven entirely by inventories. Other forms of investment hardly moved at all. As I have said before inventory accumulation is a highly ambiguous number. Sometimes a run up in stocks of goods is a sign that retailers expect high sales and thus are gearing up. Other times an accumulation represents a rise in unsold goods because consumption has fallen away and retailers are stuck with an excess. Which is it now? Looking at the hints I find it hard to tell. A rise in imports along with a rise in inventories is usually a sign that retailers are getting ready for higher sales. That’s a positive sign. I think we should take this first quarter accumulation in this light since it offsets the overly large run down in inventories at the end of last year.

Unfortunately the more telling aspect of the investment numbers are much the same as they have been for a while: weak business investment, and very weak residential investment. Businesses are showing some signs of adding to their capital stocks, but as long as the economy has as much excess capacity as it does, there is no real need to add rapidly. And, of course, we all know that real estate is in the doldrums and likely to stay there.

Trade, too, showed a big shift. The sudden drop in contribution to GDP from trade was driven entirely by an equally large change in imports. This was expected because the fourth quarter saw some very strange and large declines in imports that were not sustainable. All that occurred in the first quarter was that we resumed a more normal level of activity. The bad news was that exports faded a little also, so the resumption of a more normal pattern of imports was not offset by stronger exports.

Lastly, government spending is trending down. This may shock the “big government” hawks, but the numbers don’t lie. Federal spending dropped 0.68%, mostly on the back of a decline in defense spending. This is a notoriously volatile figure depending on bulk purchases. So I don’t think it is indicative of a trend. More importantly, both Federal and State spending on small ticket items and wages is falling steadily. This is the trend to watch. Especially as the deficit debate heats up. We have gone from a point where government spending was acting as a stimulus, to where it now acting as a drag. Presumably this is what the austerity hawks want. It is inevitable that, if government spending is cut, it will act to shrink the economy. We can use the UK as an example. There is an austerity program already in effect in the UK and its negative impact has slowed their economy to a crawl. They are perilously close to recession. Given the relative weakness of our private sector, any strong move to cut government spending runs the risk of doing the same here.

This is all tedious to recite.

What should we make of it all?

The economy is evidently not so strong that it can withstand a bout of bad weather. If that is the key explanation being offered to explain the first quarter decline, then we are not in great shape. This seems to be a very slow recovery, and one that is still very susceptible to downside risks. I suppose there is no news in this, but it should give us all pause to reconsider the current mania for deficit cutting and inflation fears.

Neither the deficit nor inflation should be of great concern right now. The focus should be on unemployment and the huge slack in the economy that such unemployment implies. We have too large a pool of idle workers. That means we are radically underperforming in terms of wealth generation. We are leaving money on the table month after month. This affects us all, not just the unemployed. It would be sensible for us all to be involved in getting those people back to work. That means more support, through both continued easy monetary policy and deficit spending fiscal policy.

This won’t happen, of course, because the powers that be have moved on to combat their imaginary demons of inflation and deficits.

This is looking more and more like the 1930’s.

That didn’t work out too well.

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Debt Conundrum

What I am about to say is not novel, but nor is it trite: if the austerians – the word we now use to describe those who advocate cutting public spending and debt – really believe that a reduction in public spending can spur, without doubt, economic growth, then the gap opened up by that reduction must be more than filled by something else.

So what is that something else?

Well, a sudden shift in trade could do the trick. That means a sudden expansion of US exports so that the US trade balance zooms from a sea of red ink towards being securely in the black. Canada managed this solution when it had budgetary difficulties. As did Sweden. Somehow I see this as unlikely here. Our appetite for oil sets a fairly high threshold for us to jump over, and the dollar would need to drop some more. With world oil prices moving higher, and not lower, the degree of difficulty is increased. At least near term.

And where would these exports go?

The data suggests there are only three viable trade partners to absorb enough US goods: Europe, Japan, and China. The Euro zone as we know is not in too good a shape, and has already reduced its trade imbalance with the US. The other two are more problematic. Japan is in all sorts of difficulties as result of the recent disaster, its economy is weakened in the short term, and any recovery there may not support a boom in US trade. That leaves China which continues to resist strong currency adjustment and thus blunts the possibility of a US trade surge.

So, even though the world economy is growing at a decent clip, it is not at all clear US exports are about to take off sufficiently to plug the gap opened up by reduced government spending.

So that throws the spotlight onto the private sector.

There we have two possibilities: investment and consumption.

I have berated big business enough times for you all to realize that I am highly skeptical about the probability of investment suddenly rising to the task of leading an economic charge. Business is awash with cash; profits are at very high levels – last year’s profit growth was the best since 1950 – and still investment is more of a dribble than anything else. Indeed the latest numbers suggest companies have reached a plateau in most forms of investment, and are now sitting around waiting to see if demand picks up enough to justify a second installment. The recent durable goods data shows a definite flattening out of growth in investment. There doesn’t seem to much else on the horizon.

So despite all that idle cash waiting to be deployed into productive activity, business investment is much too slow to offset the imminent reduction in the economy planned by the austerians. Every day that pile of cash goes unused the more the opportunity lost costs money. Since I don’t believe business willingly leaves profits on the table uncontested, there must be something preventing action. Clearly the business world is nervous about something.

And that something is the shape of household demand.

Which gets us to the center of our dilemma.

The current outlook for households is not exactly rosy. Wages are flat, indeed when the impact of inflation is accounted for they are going in the wrong direction. The job market still casts a pall across the economy, and causes enough anxiety to restrict much free spending. Home prices have dropped and caused a perceived need to replace that loss on household balance sheets with other assets. That means savings need to rise at least temporarily. That implies a decline, or at least a flattening out, of consumption. So little growth is likely from this quarter.

We have reached an impasse: none of the potential sources of replacement activity seem likely to play that role. Thus, a decline in public spending inevitably will lead to a smaller economy. GDP will decline from its current path. Whether that decline will be large enough to push us into recession I doubt. But it will be enough to throw us into a potentially endless sideways movement with constant high unemployment, and ugly performance in most important categories of activity. Stagnation beckons.

Unless.

Unless we go through a great boom in private debt.

Yes. That’s right. The only way the austerian project is viable is if household debt levels grow sufficiently to provide the spending power needed to offset the lost government spending.

This is truly perverse.

After berating us all for reckless borrowing and the damage it did to our economic stability, the austerity police are now relying on us plunging more deeply into debt so that they can cut public debt without cutting the economy. They just don’t want to admit it. Their entire plan relies on pumping private debt up beyond where it is currently. This does not mean that those folks who went into debt too deeply before have to return there. It means that others, people with healthy balance sheets, people who don’t normally borrow, and people who have cash anyway, all have to fill the void. As the crisis abates and the cleaning up of the bad debts accumulated back in the bubble are worked off, the austerians assume there is a pool of new borrowers waiting to jump in and provide the boost we need.

Some of this borrowing could come, I suppose, from businesses tapping into the banks and credit markets. But, as I said, business is awash with cash. Business doesn’t need to borrow. Besides they don’t seem keen to spend.

No. This increase in debt has to come from households. Especially those who sat out the last boom in debt.

Is this likely?

You answer that one.

I don’t think it is.

That means the austerity programs being shoved into place can have only one impact: they will contract the economy. Demand will fall. It isn’t too large a government budget that scares business into hoarding its cash. It is too small a government. Every dollar cut from government spending is a dollar less flowing through the pockets of business, both large and small. That means fewer jobs, not just because we fired a bunch of teachers or firefighters, but because we drained demand from the private sector and thus reduced the need to hire workers.

Expectations play a key role in the economy. As long as the austerians scream panic and cut, those expectations will tend towards being negative. This is the exact opposite of what the orthodox economists would preach. But they’re wrong anyway.

We have a debt conundrum: the fiscal conservatives are advocating fiscal recklessness. They just don’t want to say so. Then again, these are the same folks who brought us the Reagan and Bush deficits. So we should not be surprised. Not surprised at all.

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Growth, But Not Enough

Solid is one of those words none of us wants to hear as a description of our abilities. Solid is not exciting. Solid is very middling. There is no va-va-voom in solid. But then again neither is it bad. No, solid is just dull. Very dull.

Our economy is solid.

Ugh.

Today’s reports on GDP for the fourth quarter 2010 has growth at an annualized 3.1% rate. That’s good. It just is not good enough. If you recall, the previous estimate was for growth at 2.8%, so evidently the later data has been on the plus side. The biggest contributors to the increase appear to have been a revised inventory number, which was less of a downward drag than previously thought; and a stronger business investment figure. Neither of these was the prime motor for growth, however, since the main boost came from a combination of higher personal consumption and a better trade balance. Since this is the third and final report of the fourth quarter this is the one that goes into the books. It also brings to a close the revising of the overall 2010 performance which is now settled at 2.9%, compared with the drop of 2.6% in 2009.

While that turn around appears terrific I must warn you that it is nowhere near good enough. A more typical recovery would have seen much faster growth in the first full year after a recession. Then again, the economy has gone through significant changes over the last three decades, one consequence of which is the the days of very fast recoveries seem to be over. The trajectory in the last three recessions has been for much less rapid recovery from a much longer decline. My view is that this change stems, at least in part, from the reduced emphasis on manufacturing in the overall economy. In the earlier post-war recessions, the cycle was dominated by sudden shifts in factory employment. The adjustments were quick and dramatic. But as finance, and other services, grew in importance those dramatic shifts have given way to much longer and more difficult adjustment periods. Those famous V shaped recessions have given way to elongated U’s. And the Great Recession was so deep, and so shocking, that we are still lingering near the bottom and are nowhere near climbing back to where we would have been had there been no downturn.

That, I think, is what most people overlook.

Had we avoided the downturn we would have had an economy chugging along between 2.5% and 3.0% a year. OK, but not great. Solid in fact. But we blew a great hole in that history so the long term trend line now shows a big downward dip. If we plot our actual performance against the trend line we would all notice that we are not back to where we would have been. That means we still have lost momentum to recover. And don’t forget: to the extent we wallow about beneath the long term trend line we are forgoing wealth that we will never recover. Not, that is, unless we accelerate to growth rates well above the trend line.

And therein lies our problem.

GDP growth in 2010 was insufficient to recoup our lost wealth. So that loss is permanent. In effect we have recovered in name only. The deeper reality is that we have an impoverished economy more limping than running along.

The slowness of growth last year is very worrying because there are many signs pointing to weakness at the moment. Real estate is stuck so deep in a hole that no one can credibly suggest it returns to be the boost it was during the 2000’s. Which is probably good in view of the damage it wrought. Exports are our best shot at getting medium term growth, but for that to come to fruition we need a further devaluation of the dollar and some cooperative adjustments in our trading partners to deal with their own imbalances. In particular, the Chinese, Japanese, and Germans all need to reduce their export reliance by boosting their domestic consumption. Their economies are built around excessive employment in exporting businesses which deprives us of jobs and their own people of consumer goods. Unless there is a willingness to deal with these imbalances, I doubt that our trade position will provide the boost to our GDP growth I would like to see.

So what else could?

Not much.

Business investment could be one area of extra growth, but there is little sign of a boom there. Companies are sitting on piles of cash and are not deploying it productively at the moment. This is with historically low interest rates which implies very low investment hurdle rates. If business can’t find profitable opportunities at these rates I doubt they will suddenly burst into activity any time soon.

Consumption would be another possibility for higher growth, but that too looks set for drift rather than acceleration. Households are still grappling with rebuilding their balance sheets to compensate for lost home values While the stock market has recovered, and thus boosted some family portfolios, housing was always a bigger wealth provider for the majority of people. So as long as home prices remain weak, and they have just begun to decline again, most households will look to save more than before to create a cushion against uncertainty. This, obviously, shifts a portion of income from spending to savings and thus slows GDP down. The possible offset to this slowdown would be if those savings found their way into an expansion of investment, but as I just said, there is no evidence of much growth in that sector.

The last possible area for growth would be government spending, but as we are all painfully aware the current emphasis is on reducing not increasing government activity. So, far from being a net boost, I expect the cost cutting mania now sweeping the nation to become a net drag on growth. Yes, this is dumb. And, no, it won’t change. We appear hell bent on slowing growth down.

All of this means that the outlook for GDP is not too terrific. The economy is out of the deepest parts of the hole it fell into, but it is not yet healthy enough for us to breath easily. The ugly truth is that we appear set for drift. There is no appetite for fiscal policy remedies, which leaves us reliant on the Fed’s loose monetary policy. With interest rates at practically zero we have no room to maneuver. Not that this worries policy makers. They have all moved on to the deficit and debt as their problems to solve. The fact that the best solution would have been a rapidly expanding economy eludes them.

Oh. And one more thing. Buried on today’s report is data on corporate profits. Guess what? Despite all the moaning about the administration’s supposedly anti-business attitude, and despite the gloom and doom we hear constantly from the Chamber of Commerce, profits soared. And I mean soared. Before tax corporate profits grew 36.8% in 2010. Read that agin and digest it fully. Profits boomed. Last year was the best year for profits since 1950 which was an odd year itself as business boomed after the post war recession. No wonder stock prices rose. Couple this with the news that GE is getting a tax rebate of over $3 billion on gross profits of over $14.2 billion – of which $5.1 billion was in the US – and it easy to understand why workers might be perplexed by the idea that they need to give back more in order to solve our supposed “debt crisis”.

These are boom times for capitalists. Just not for the rest of us.Today’s report simply confirms this.

Until we restore a more equable balance the economy will remain merely solid. That’s not good enough.

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