Radio commentary, March 18, 2010
In U.S. economic news, more signs of modest recovery. Early in the week, we learned that retail sales rose an OK 0.3% in February. Weak auto sales dragged down that headline number; stripping them out, sales rose a pretty healthy 0.8% last month. Sales of electronics and appliances, sporting goods, and at restaurants and bars were pretty strong. The mix was a departure from recent retail bahvior, when spending on necessities predominated. Now we’re seeing more indulgence and frivolity in the mix. And, in another departure from recent behavior, it looks like the upper end is opening up its wallets. Throughout the recession, purveyors of so-called luxury goods lagged the averages, with discounters and wholesale clubs picking up market share. Now, luxury sales are picking up again. But, in a reminder of just what a bifurcated world we’re living in, the discounters and wholesalers are still doing pretty well—it’s the middle that’s lagging.
I doubt that these retail figures announce the beginning of a return to exuberance, or even recreational shopping. They do suggest the effects of what some analysts have called “recession fatigue”: people are tired of bad times and are letting their belts out a notch. If they have belts, that is. The job market, while a lot better than it was a year ago, is still weak, and unemployment, especially the chronic long-term sort, is very high. But it’s looking like people with jobs are spending a little more freely.
Jumping off data like this, and the not-bad February employment report, and some excitable Wall Street are talking about a recovery accelerating into something strong. That strikes me as hard to believe. Among their favorite pieces of evidence is the loss of “just” 36,000 jobs in February. Since there was a bad snowstorm in the northeast during the week the employment surveys were taken, which supposedly would depress employment significantly, the enthusiasts are saying that underlying employment trends are now turning strongly upwards. I doubt that the storm effect is anywhere near strong enough to knock a hundred or two hundred thousand workers off the rolls, so I’m really skeptical that this strong upturn was buried under a foot of snow. It’s likely we’re going to start seeing some mildly positive job numbers in the coming months, but not the 300,000 you’d expect in a textbook recovery.
Confirmation of that came with Thursday’s release of the cyclical indicators from The Conference Board. Their coincident index, which is an average of four major economic indicators designed to give a summary picture of the state of the abstraction known as The Economy, rose a modest 0.1% in February. That’s about half the average for an economic recovery, and a third the average for a strong recovery. It’s pretty much in line with what we saw in the weak recoveries of the early 1990s and early 2000s. The Conference Board’s leading index, which is designed to forecast movements in the broad economy three to six months in the future, also rose 0.1%. That’s about a quarter the rate we’d be seeing in an average recovery, and a sixth what we’d see in a strong one.
So, putting all this together, I see no reason to change my prognosis: we’re now about eight months into an economic recovery that’s going to be a grinding, frustrating thing that will feel to many of us like the recession never ended. It’s good news that things aren’t getting worse, but they’re not doing all that much to get better.
Earlier in the week, the Federal Reserve announced after its regular policy-setting meeting that it will continue to keep interest rates “exceptionally low” for an extended period of time. The language of their press release suggested slightly more optimism, but not as much as Wall Street’s bulls are exuding; the release pointed to, for example, employers’ continuing reluctance to hire. (In fact, the use of that phrase in conjunction with their description of the labor market as “stabilizing” sounded so much like what I’ve been saying that I almost got worried.)
This is good news. What recovery we’ve seen is largely the result of the Fed’s easy money and Washington’s stimulus program. But that StimPak will start to fade late this year, and it’s not clear whether the economy will have acquired enough of its own internal juice to survive the withdrawal of all that money from Washington. Fiscal policy is going to turn rather dramatically contractionary in 2011 and 2012, a rather scary prospect that almost no one in Washington or in the punditocracy seems worried about. You’re hearing a lot more talk about austerity and budget-cutting than about the risks of tightening fiscal policy in a weak economy.
Wie sagt man <<sadomonetarism>> auf Deutsch?
But our austerity party has nothing on the Germans, who are the current world champs of sadomonetarism. A few weeks ago, the Greek economist Yanis Varoufakis said on this show that a source in the European Central Bank told him that Germans were quite eager to put his country and the other weaklings on the periphery of Europe through the wringer, because they don’t want to fund a bailout. And since they export all their goodies like BMW’s to the elites of those countries, they don’t give a damn about the purchasing power of the masses—a Greek depression won’t harm German industry. The other day, the French finance minister, a far more respectable voice than radical economists interviewed on Behind the News, urged the Germans to loosen up. But so far the Germans will have none of it. They don’t want to set up some sort of intra-European version of the IMF to run bailouts; they think that such a body wouldn’t be as stringent in its demands for austerity as the existing IMF would be. (It’s not clear whether this is true.) Under EU pressure, Greece has already agreed budget cuts and tax hikes of almost 5% of GDP—a very stiff dose of austerity. The EU probably expects more, but that’s about all it can get in a year. The result will almost certainly be a deep recession.
But does austerity actually work? (Work in the sense of restoring economic growth after a period of pain imposed on nonelites, that is.) It doesn’t seem so. In a note to clients earlier this week Citigroup wrote this:
[I]t is interesting at this point to draw some comparisons between the Greek and the Irish consolidating plans. Ireland has been praised as a benchmark to follow in terms of its swift and bold turn in fiscal policy [that] is very close to the total fiscal effort envisaged by Greece now…. However, despite all the belt-tightening over the past year, the Irish budget balance has not yet shown signs of improvement and it still looks remarkably similar to the Greek one. The Irish budgetary position has not managed to improve yet after almost one year since the introduction of the first austerity package, mainly because of the collapse in real and nominal growth which was, in part, induced by the fiscal tightening itself.
Surprise surprise—bloodletting can be hazardous to your health.