Sunday Times (London)
July 8, 2012
by Irwin Stelzer
Two per cent is no solution. That is the growth rate chalked up by the US economy in the first quarter (1.9% for those who believe in the precision with which GDP is measured), and the rate that most forecasters see in America's near-term future.
It won't do much to bring down unemployment, or to persuade businesses to worry less and invest more, or to prise a few extra dollars from consumers to send their kiddies back to school in style. Christine Lagarde, managing director of the International Monetary Fund, characterises the US recovery as "tepid" and warns that it will morph into a recession if current legislation calling for a huge tax increase and sharp spending cuts at year end are not cancelled, and if Congress does not "promptly" raise the debt ceiling to avoid spooking financial markets.
Worst of all, the second quarter was the worst for job creation in two years. Only some 80,000 jobs were added in June, the unemployment rate remained stuck at 8.2%, and the more meaningful rate (technically, U6), which includes workers too discouraged to continue looking for work and those involuntarily working short hours, ticked up to 14.9%. This means that more than 23m workers can't find full-time work. Some 5.4m have been out of work for 27 weeks or longer, and millions more have dropped out of the labour force completely, bringing the share of the working-age population with jobs or looking for work to a 30-year low.
Most economists, who had spent the week raising their job forecasts, were embarrassed (assuming that economic forecasters are capable of embarrassment), but not quite as much as President Barack Obama (assuming that politicians are capable of embarrassment), who now has to explain why his $1trillion stimulus and massive deficits have failed to produce a more rapid recovery.
Fortunately for the president, he ranks among history's better campaigners. About 2m jobs have disappeared on his watch, and the unemployment rate has risen from 6.8% to 8.2%, but he is managing to paint Mitt Romney as the cause of workers' woes. Using waves of television ads in swing states, Obama has successfully characterised the former head of Bain Capital as "job outsourcer in chief".
The inability of the Romney camp to fashion a response has political observers wondering how long the campaign will stick with its strategy of saying little of substance while banking on Obama's poor economic record to get the moving vans loading up at the White House early next year.
Alan Krueger, chairman of the president's Council of Economic Advisers, took to television immediately after Friday's jobs report to point out that 4.4m private sector jobs have been added in the past 28 months, proving "the president has the right medicine for the economy" — more infrastructure spending and more money to states to hire teachers and firefighters. In effect, damn the deficits, full spending ahead.
There is little doubt that the economy is not moving forward at a pace likely to whittle the unemployment rate down significantly. In June, the factory sector contracted for the first time in three years, according to the Institute for Supply Management. Exports, which have been an important source of growth, continued to grow, but at a slower rate. Europe's recession, and a weakening euro that makes American goods more expensive, are combining to reduce demand for made-in-USA products. Ford and Harley-Davidson, among other companies, report marked drops in sales in Europe, and Caterpillar's formerly robust growth in Europe, Africa and the Middle East now fits Lagarde's description — tepid — although the company still predicts record earnings for the year. Analysts expect falling overseas sales to cause drops of about 25% in the second-quarter earnings of Ford and GM, with some saying the GM drop will come to as much as 45%. With growth in China slowing, Nike and other firms with a significant presence in that market are being hurt: orders for future delivery of Nike products are running about 2% above last year's rate, compared with recent growth of about 20%.
Closer to home, much depends on two things: consumers' willingness to spend, and businesses' willingness to invest. Although wages seem to be rising, consumers, who account for 70% of the entire economy, are cautious. A weak jobs market, press coverage of Europe's problems, the slowdown in China, Iran's refusal to halt its nuclear weapons programme, and political deadlock in the US have brought consumer confidence down to its lowest level this year. Retail sales at the 18 chains tallied by Thomson Reuters did rise in June, but by only 2.5%, the slowest since November 2009. But petrol prices are down, and average weekly hours worked by those with jobs, and average hourly earnings, are both up, perhaps signalling an improvement in consumers' circumstances in the next few months.
Meanwhile, businesses continue to sit on their cash — $1.74 trillion in liquid assets. With profits under pressure, Europe in recession, China struggling to regain its past growth rate, the American economy headed towards a fiscal cliff, the fortunes of pro-business candidate Mitt Romney waning, and healthcare costs likely to soar now that Obamacare has been declared constitutional, "wait and see" is the corporate and small-business order of the day.
The only good news comes from the motor and housing sectors. Vehicle sales in June topped last year's total by 22% as consumers continue to replace a fleet that is about 10 years old. As for housing, prices are up, sales are up, rents are high and rising, builders are more active, and interest rates on long-term fixed-rate mortgages are about 3.6%, the lowest since such mortgages were first offered in the 1950s.
Still, the bad news trumps the good, leading to calls for the Federal Reserve Board to follow its British, Chinese and European colleagues and start another round of monetary easing. Don't bet on it just yet: Fed chairman Ben Bernanke is not a "ready, fire, aim" kind of guy.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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