What Lies Ahead For The Economy?
Where is the economy headed? The signals are mixed at best.
The Commerce Department’s initial report of economic growth in the Third Quarter told us that the economy grew at an anemic, but still respectable, 2.5% annualized rate between July and September. Last month, that number was revised downward to a far less impressive 2.0% rate. Today, the Commerce Department came out with its final revision of the Third Quarter numbers and pegged growth at the rather disappointing annual rate of 1.8%:
The U.S. economy expanded less than thought during the third quarter as consumer spending fell short of an earlier estimate, though signs point to stronger growth in the final months of the year. Gross domestic product, the broadest measure of all the goods and services produced in an economy, grew at an inflation-adjusted annual rate of 1.8% in the July to September period. While still the strongest performance of the year, the Commerce Department’s third estimate of GDP is lower than the previous reading of 2.0%.
Economists surveyed by Dow Jones Newswires had forecast 2.0% growth. The economy’s lower growth level was largely due to a downward revision of how much consumers spent, especially for services such as health care. The latest estimate showed personal consumption expenditure, which accounts for about two-thirds of spending in the economy, rose by 1.7% in the third quarter. That compares to a previous estimate of a 2.3% increase.
This rather disappointing news comes at the same time that there are some signs that the economy has been picking up in the final quarter of the year. For example, jobless claims fell again this week to reach their lowest level in more than three years. The fact that there were still more than 360,000 initial unemployment claims in the past week isn’t good news, but compared to six months ago when the weekly number was consistently above 400,000, it’s better than it has been. It’s unclear if these changes in the labor market are a seasonal reflection of holiday time retail hiring, an indication that more people are simply choosing to drop off the labor rolls, or a sign of something more permanent, though, is unclear. On the positive sign, the Conference Board reported that its Index of Leading Indicators increased again in November, suggesting that economic growth in the coming six months will be stronger. There have been other positive reports in recent weeks, but some economists are warning that they could be masking dangers ahead:
There are two reasons for the renewed pessimism. First, economists say that temporary trends increased growth in the fourth quarter and may not continue into next year. Second, the economy faces significant headwinds in 2012: some from Europe’s long-lingering sovereign debt crisis, and some from domestic cutbacks beyond the control of President Obama, whose campaign would like to point to a brightening economic picture, not a darkening one. Even the Federal Reserve is predicting that the unemployment rate will remain around 8.6 percent by the time voters go to the polls in November.
The fourth quarter benefited, for instance, from wholesalers restocking inventories of goods like petroleum, paper and cars, giving a jolt to growth.
“We had lean inventories, so those required additional production to satisfy demand,” said Gregory Daco of IHS Global Insight. “But once inventories are restocked, there is no need to restock them anymore. That means there’s going to be less production,” he said.
Consumers also pulled back on their savings, helping to finance a recent spurt in spending. a trend that forecasters doubt will continue. Other short-lived factors include falling gasoline and commodity prices, and an increase in orders from Japanese companies returning to business after the devastating spring tsunami.
But next year, Washington is increasing some taxes and reducing spending as temporary measures enacted during the worst of the recession expire. That will damp growth by a percentage point or more next year, forecasters say. Provisions like a tax write-off to help businesses pay for equipment are winding down or ending.
Most worrying is the prospect that Congress will drop aid for the long-term jobless and allow payroll taxes to rise to 6.2 percent from the current level of 4.2 percent, amounting to a $1,000 tax increase on the average wage earner. Macroeconomic Advisers, a prominent forecaster, estimates that the expiration of the two provisions could cost the economy 400,000 jobs and cut growth by half a percentage point next year.
How and when Congress acts will also have an important, if impossible to quantify, impact on consumer and business confidence, economists say. Households and companies uncertain about their income, unclear about their tax rates and lacking confidence in their government might hold off on major financial purchases and tighten their purse strings.
Then there is Europe.
“If there is some Lehman-type event in the first half of the year, it will have a big impact,” said Joel Prakken, chairman of Macroeconomic Advisers. The collapse of Lehman Brothers, a New York investment bank, in late 2008 helped set off the financial crisis.
Even without such a major event, forecasters say problems on the Continent will weigh on American growth next year. Investor flight from assets denominated in the shaky euro have made the dollar stronger and American exports less competitive abroad. The euro zone’s woes have also made a global slowdown more likely, which could mean a reduction in American exports to emerging-market countries as well.
This is actually consistent with the economic forecasts we’ve been hearing for several months now, from government and private forecasters. At the very most, we appear to be looking at growth in the 1.5%-2.0% range over the course of next year, with little prospect that unemployment will drop below 8.5-8.9% during that time (and remember that the unemployment rate is likely to increase at least for a temporary period as the economy improves and people who have been sitting on the sidelines start looking for work again.) If there’s an economic shock, whether form increased international tensions in the Middle East, more economic chaos in Europe, or what have you, then even those relatively pathetic forecasts will seems optimistic in the end.
The question we haven’t figured out the answer to yet is how to get the economic engine moving again so that we have the 3.0-3.5% growth rates, preferably higher, that we really need to turn the economy around at this point. To be honest, we don’t even know if we can do that at this point.
Back in October 2010, Dave Schuler wrote a piece over at his own site suggesting that we may be entering an era where economic growth will be more like Europe than what we’ve become used to in the post World War II era:
[T]he experience in growth over the last twenty years shows a markedly slower rate than prevailed over the previous twenty years or the previous forty years.
Second, the period since 1990 has included two bubbles: the dot-com bubble and the real estate bubble. Those bubbles are clearly evident in the peaks over the last twenty years.
What forces could lead to growth at the 4% or higher level? Besides the unexpected which is just that, unexpected, I can only think of two. If you believe that we’re going to experience growth at a level higher than that of other developed countries you must either believe that we’re going to continue to experience a high level of immigration and/or that we’re going to continue to experience bubbles
We’re already living through the consequences of what happens when economic bubbles pop, trying to repeat that would seem to me to be rather stupid (not that I would put it past the guys in Washington to do something stupid, of course). Increasing immigration is a political non-starter at this point. Thus, as I observed in April, we’re left with a situation where the people in charge don’t really know what to do:
The old tools for stimulating the economy don’t seem to work anymore. If nothing else, the obvious failure of President Obama’s stimulus package to turn around the economy or halt the collapse of the jobs market would seem to be proof that the old Keynesian tools don’t work anymore. With a Federal Budget that is increasingly diverted to paying interest on the National Debt and funding entitlement programs, neither one of which contribute all that much to economic growth, it’s simply not possible to throw money at the problem anymore …………. Of course, budget deficits also mean that tax cuts, the traditional Republican answer to slow economic growth, isn’t really an option at the moment either. In fact, taxes will clearly have to be increased for some people, and that’s likely to further depress economic growth.
Politically, this raises a whole host of issues. Republicans have railed for years against the idea that Democrats want to make America like Europe. If the ec0nomic forecasts are right, though, we may end up being more like Europe than anyone actually wants to be.