Too Soon to Declare Economic Woes Over
Profits are back, production is up, houses and cars keep selling like crazy. The clear consensus of American economists is: We’re back!
But here are three reasons to curb your enthusiasm for now.
Reason No. 1: Being above zero is not the proper measure of economic success, and we may be nowhere near what is.
The latest rash of economic forecasts seem so dazzling precisely because the numbers that economists have been tossing out -- a 4.5% annual growth rate this quarter and a 4% rate the next -- are larger than anything we’ve seen in years, and far above zero.
But zero is not where the growth game really begins. For the economy to lift into a self-sustaining recovery, it needs to be zipping along at a pretty fast clip to start with, and much faster than in the past.
It needs to expand 1% a year just to take care of “new entrants” -- all those young people looking for first jobs and spouses who’ve decided they want to supplement their families’ incomes. It needs to grow an additional 4% to get ahead of recent productivity gains, which means the same number of workers using pretty much the same plants and equipment can make more goods and services, making new workers unnecessary.
“It’s starting to look like 5% a year sustained growth is what’s needed,” said UC Berkeley economist Brad DeLong.
Nobody says the U.S. economy can’t eventually grow this fast. But almost nobody -- not even any of President Bush’s economic advisors -- is predicting that it will do so anytime soon, largely because they can’t see anything that’s likely to kick growth into high gear.
Reason No. 2: Signs of the long-awaited business investment comeback, the one that’s supposed to relieve consumers of the need to prop up growth with their spending, are still mighty hard to find.
Unlike virtually every other recession since World War II, the 2001 downturn was caused in large part by corporate America’s decision that it had bought too many computers, laid too much fiber optic cable and waded into too many profitless ventures. Businesses hit the brakes, and economists have been waiting ever since for them to begin investing again.
To be sure, some companies have started replacing aging high-tech equipment. A recent Goldman Sachs survey of 100 major firms, for example, found that their technology spending plans rose 0.2% last month.
But the blip in tech spending isn’t big enough yet to make an economic difference and does not seem to point to a broader trend.
Indeed, nearly two years after the economy began growing again, after-inflation spending on producer durable equipment -- the gizmos companies use to make new things and provide new services -- is only about a third of what it usually is at this stage of a recovery.
Spending on new buildings, which is usually up by this time, is down 15%. Commercial and industrial bank loans, a bellwether of small- and mid-sized business activity, have slipped nearly 5% this year alone.
“Businesses are not investing; they’re not spending,” said Mark Zandi, chief economist of West Chester, Pa.-based Economy.com. “They’re not adding to inventories. They’re not advertising to any degree. They are not traveling. And clearly they’re not hiring.”
Reason No. 3: Although most economic indicators now point up, America’s jobs total is still headed down and is unlikely to turn around quickly.
The trend is by now depressingly familiar: Nonfarm payrolls shrank by 93,000 last month and are down 1.1 million since the nation began to grow again almost two years ago. But the potential threat to the economy is not as widely appreciated.
Having a job, or the confidence that you can land one, is the single biggest determinant of whether consumers, who account for the lion’s share of economic activity, keep buying or buy even more.
“For most of us,” said Los Angeles-based economist Donald H. Straszheim, “if we have a job, we’re OK. If we don’t, we’re not, and people don’t shop.
“If jobs fail,” he said, “so does the economy.”
Economic optimists have offered various responses to the stubbornly contrary job trend.
Some say that even with the recent losses, the nation’s unemployment rate has remained remarkably low by historical standards, hovering around 6%. So the losses will have only minimal effect.
What these analysts miss is that the nature of unemployment has changed in recent years. The average length of time out of work has climbed. With it, so has the financial threat that joblessness poses for Americans. The result: The comfort of a low unemployment rate is being offset by increasingly dire possibilities that flow from being laid off.
Other optimists assert that the numbers are wrong and the country is actually gaining jobs. They charge that the Labor Department’s survey of employers, on which the payroll counts are based, overlooks the small companies that are usually the first to start hiring when recessions end.
But the department has spent the last three years fixing the small-company problem, and many analysts think it has done a pretty good job.
“The fact is, the job market is a mess,” Zandi said.
Still other optimists assert that although payrolls may be shrinking now, new jobs -- millions of them -- are just around the corner. But a recent New York Federal Reserve Bank study, the first to try to explain what distinguishes this recovery and its early 1990s cousin from others in the last half-century, puts a serious damper on their predictions.
The study by economists Erica Groshen and Simon Potter concludes that most job losses in the two recent recessions involved permanent elimination of positions, not temporary and easily reversible layoffs. And it says that most of what gains there have been so far this time have involved establishing new jobs in wholly different parts of the economy from where the losses occurred.
“If job growth now depends on the creation of new positions in different firms and industries,” Groshen and Potter write, “then we would expect a long lag before employment rebounded.”
Translation: Don’t expect a jobs boom -- and a big new lift for the economy -- anytime soon.
