All We Can See Is the Clouds in the Silver Lining

The bad news is that there is a lot of bad news. BP, known to our president as British Petroleum, is destroying the ecology of the Gulf of Mexico, and wrecking the economies of the states that abut it. The eurozone is in a state of chaos as profligate nations prove unable to repay the money they have borrowed, creating the possibility of another collapse of the international financial system.

Tensions in the Middle East and on the Korean peninsula are rising. Japan’s prime minister has resigned, as has Germany’s president, unsettling the political picture in both countries, not good news for those hoping for robust recoveries in the world’s second and fourth-largest economies, respectively. China’s economy, the third largest, seems to be overheating. Iran’s effort to go nuclear proceeds, unimpeded by UN resolutions or sanctions.

Meanwhile, the American economic recovery is experiencing a wobble. Only 41,000 of the 431,000 non-farm jobs created in May were in the private sector, and perhaps 20% of those, by one estimate, were to help clean up the oil spill. The government hired 411,000 temporary and low-paid census takers, bringing the total knocking on doors to 564,000. They will soon return to the unemployment rolls or part-time work. No surprise that share prices plunged when the bad jobs news was released.

Still, there are signs that the recovery has not flamed out. The Organisation for Economic Co-operation and Development expects the American economy to grow at an annual rate of 3.2% this year and next. Consumers’ incomes rose in April, and it is hardly bad news that they decided to save the increase rather than step up spending. Besides, their refusal to spend comes not because of any new gloom: confidence actually rose last month to its highest level in two years as consumers reported that their view of the future has become cheerier. A survey by Deloitte found that nearly two-thirds said their financial circumstances were as good or better than last year. Which might explain the big jump in car sales in May.

President Barack Obama’s plan to double exports in the next five years is more a campaign talking point than a realisable goal, but exports are picking up. The Institute for Supply Management reports they are at their highest level since 1988. Those export sales helped the manufacturing sector achieve its tenth successive month of growth. The president of Cyril Bath, a manufacturer of machines used in the aircraft industry, told The Wall Street Journal: “We’ve got orders coming in from Europe. We’ve got orders coming in from Japan, China, India and Russia. They’re coming in at record levels . . .” Rational exuberance, one hopes.

It is, however, not for nothing that economics is known as the dismal science. In addition to very weak job growth, economists note that estimates of fourth-quarter 2009 GDP have been revised down from 3.2% to 3%. The gloomier ones also point out that consumer confidence often rises and falls with the job market, and the low level of job creation last month, plus the inevitable lay-offs when the census-taking is completed, will soon wipe the smiles off consumers’ faces.

Worse still, economists cannot decide whether to worry about deflation or inflation. With prices already edging down, substantial excess capacity in the system, and euroland about to withdraw large amounts of demand from the world economic system as austerity bites, it is reasonable to worry that a Japanese-style deflation is in America’s future. That sort of thing is hard to reverse: knowing that prices are declining, consumers defer purchases, which causes prices to fall further, which in turn causes consumers to keep their wallets and purses zipped. Result: recession.

Others fear just the opposite. With the government running huge deficits, and the Federal Reserve printing money, we will have an inflationary spiral, with the value of the dollar declining, savers devastated, and interest rates soaring as investors demand higher and higher rates for their money, knowing they will be repaid in dollars with reduced purchasing power. This explains the flight to gold, widely believed to be a hedge against inflation.

Or, if you prefer your “dismal” to be of the imported variety, the tale of woe goes like this. The declining euro, headed perhaps to parity with the dollar, will stifle America’s export business. And Europe will also send over a financial crisis, as its banks take big losses on sovereign debt and on loans to Greek and other enterprises. Already, banks are hoarding money, threatening a seizing up of credit markets on a scale not seen since the collapse of Lehman Brothers. And companies have decided to rein in borrowing, given the uncertainties in credit markets.

Then there are home-grown policy developments to worry about. The financial reform bill that will soon end up on the president’s desk, whatever its merits, and there are several, will create a bakers’ dozen of new regulatory agencies, according to my Hudson Institute colleague, Diana Furchtgott- Roth. It is not likely to produce an optimally efficient financial sector. Tax increases are scheduled to hit soon after the November congressional elections, costly regulations are being imposed on the resurgent car sector, and estimates of the cost of what has come to be called Obamacare rise almost every week.

These are all reasonable worries, but all a bit overblown. The more likely outlook is for a continued recovery, though the pace is uncertain. The Federal Reserve is now unlikely to implement any exit strategy it might have, keeping interest rates low. Congress is even less likely to pull the trio of artificial props — Fannie Mae, Freddie Mac, Federal Housing Administration — from under the mortgage and housing markets.

And a new stimulus bill is certain to precede the November elections. So growth there will be, barring any shocks to the system. Which, of course, are not out of the question in this very uncertain world.