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.

FILED UNDER: Economics and Business, US Politics
Doug Mataconis
About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010. Before joining OTB, he wrote at Below The BeltwayThe Liberty Papers, and United Liberty Follow Doug on Twitter | Facebook

Comments

  1. Of course the GOP is creating huge “regime uncertainty” with their “will they or won’t they” on payroll tax, and essentially all economic measures.

  2. Ron Beasley says:

    The world economy is too broken for anyone to fix. With oil at or near $100 a bbl economic growth can at best be anemic. There is trillions of dollars in both sovereign and private debt that is never going to be repaid and the world financial system is going to collapse. We are already seeing the social unrest that will result and that will only get worse.

  3. Rob in CT says:

    I’m going with “more muddling through.”

    Thanks for brightening my day, Ron. 😉 I hope you’re wrong.

  4. @Ron Beasley:

    Thank you for the tidings of comfort and joy during this holiday season :/

    Sadly, I think you may be right.

  5. Hey Norm says:

    “…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…”

    Well, if you live in a paralell universe…OK. You really need to stop repeating the same old nonsense. Rick Perry thinks the Stimulus didn’t create jobs. The CBO has a different view. while I don’t agree with you much I ghave always thought you were smarter than Rick Perry. maybe not.
    Look…the US economy is more inequitable than the economy of ancient Rome. There is no DEMAND from the Middle Class…who have ben enjoying stagnant wages for the last 3 decades while the top earners have seen an increase of almost 300%. Until there is DEMAND we are going to continue to recover slowly. The only way to get the economy running at 3+% is to get $$ into the hands of the Middle Class. Tax Cuts for the rich will not do it. Austerity measures will not do it. Taxing the 47% will not do it.
    Build-Baby-Build. INVEST in infrastructure. Money is cheap…the bidding environment is still hyper-competitive…and there is plenty of available labor. We used to build stuff. Then in the ’80’s we stopped so that we could give tax cuts to the rich. It’s been proven that those theories do not work. It’s time to jettison the failed economic theories and start building stuff again.

  6. Ben Wolf says:

    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.

    None of this is true, but by all means, do keep spreading misinformation.

  7. Ron Beasley says:

    @Doug Mataconis: Hate to be a holiday popper but you are the one who wrote the post. The only question is how much longer will the bandages for the scalp wound hold before the bullet in the brain kills the patient.

  8. @Ron Beasley:

    Sigh. I know. you’re right.

    It’s funny, though. I was emptying out a storage area recently and found a box with old copies of Wired Magazine from the late 90s/early 2000s. Not only was the magazine 2-3x thicker than its current version, but it was filled with optimistic articles about how we were entering an era of eternal prosperity.

    How times change.

  9. Ron Beasley says:

    @Doug Mataconis: I’ve got some Popular Science Magazines from the 60s – Oh how wrong they were. We were all supposed to be living like the
    Jetsons now.

  10. @Ron Beasley:

    I knew we were all going to get screwed when the year 2000 came around and I didn’t have my flying car.

  11. anjin-san says:

    I knew we were all going to get screwed when the year 2000 came around and I didn’t have my flying car.

    I would have settled for the shiny suits like the ones on Lost in Space…

  12. Ron Beasley says:
  13. @Ron Beasley:

    Until they rebel against us

  14. Ron Beasley says:

    @Doug Mataconis: Indeed, The Machine Crusade. But the machines were unable to outsmart the illogical humans in the end because they weren’t logical. While this is not an endorsement of Bachman or Santorum illogical unpredictability can be a plus when dealing with logical predictable machines.

  15. Console says:

    The worst case scenario for a financial crash is the great depression… we are pretty damn far from that so let’s not get all uppity about the failure of keynesian economics. And in fact, as far as developed countries hit by the crash go, we are doing a lot better than most of them.

    There isn’t really a whole lot to this. It’s a balance sheet recession and growth won’t return until demand does, and demand won’t return until people pay off enough debt. We could move a lot of that debt onto the government’s balance sheet and that would help, but the only people we’re allowed to give free money to are bankers. For everyone else, moral hazard and all that. And let’s not forget the useful idiots that whine about government debts and deficits
    “You know how tall a trillion dollars stacked is!”

    That’s not to say that the only blame for our stupid economic policy goes on conservatives. Because the Obama admin had tons of power to deal with the housing market on it’s own and blew it. Failure to push cramdown, principle reductions, and refusal to get tough with bank in any way pretty much ensured things like HAMP would be a failure.

  16. superdestroyer says:

    @Hey Norm:

    Building is not cheap for the government because the government has to comply with so many regulation. Just look at how high-speed trains were sold as good for the economy during the 2008 election but one mile will not be operational when President Obama leaves office in 2017.

    It is hard to increase demand when people will be paying higher taxes (like Maryland’s $0.30 per gallon gas tax or higher real estate taxes in many states), more money for health care and more money on lifestyle choices meant to avoid being around poor people.

    Pork barrel spending on construction generally means that illegal aliens building pork ladden projects and then either sending the money back to Mexico or spending the money at Wal-mart on consumer goods made in China.

    Keynes is dead and Keynesian economics cannot work in a global economy. Deficit spending to pay people to do things so that they can purchase things at Wal-mart is a losing strategy.

    As long as progressives support open borders and unlimited immigration, it is obvious that progressives do not care about jobs.

  17. Lomax says:

    The economy won’t improve until the people have the money to spend and stimulate business. Here are some ideas to put money in people’s pockets:
    Have a tax free week: no Federal taxes on anything for one week a year, including income.
    Straight deduction (not a percent) for medical expenses and premiums: these expenses can run $3-4,000 a year at least.
    Deduction for credit card and personal loan interest: this will stimulate purchasing
    Tax deduction for miles driven a year: gas has gone down, but not nearly enough. Truck drivers, cab drivers, and others who depend on gas for income are suffering. All middle class people are having it rough because of these high gas prices: travel, shopping, going to work and church – all cost more
    Let people borrow off of their future Social Security benefits: they can repay these loans when they start drawing their checks later. This is our money: let us enjoy it now!
    Tax rates will be tied to the consumer price index: when it goes up, tax rates go down.
    Those are some of my ideas.

  18. R B says:

    @Lomax: I was with you on several of your ideas until I got to the one where you stated

    “Let people borrow off of their future Social Security benefits: they can repay these loans when they start drawing their checks later. This is our money: let us enjoy it now!

    There are few things wrong here

    1 – it was never our money, don’t you get it? That money leaves our hands and goes right into the hands of the old drawing benefits. It’s the world’s greatest Ponzi scheme.

    2 – you cannot trust the average Joe to borrow off of their future benefits and they pay them back. You’ll hear complaint after complaint and it will only set the average Joe up for failure. They’ll be left with losses and less money out of already reduced paychecks and end up failing to provide for themselves. It’s like asking a casino for a loan that you will pay back with future winnings. Not going to happen.

    3 – if you want us to “enjoy” it now, let us manage it ourselves in our own accounts, instead of relying on someone else to manage (and pilfer from) it. Also, introduce a system with a VAT tax that provides social services like Europe and we can forego worrying about SSN payments. You don’t see all these “needy hands” demanding money in Europe – and they live pretty good lives over there.