Floyd Norris at NYT:
The American economy appears to be in a cyclical recovery that is gaining strength. Firms have begun to hire and consumer spending seems to be accelerating.
That is what usually happens after particularly sharp recessions, so it is surprising that many commentators, whether economists or politicians, seem to doubt that such a thing could possibly be happening.
Why is good news being received with such doubt? Why is “new normal” the currently popular economic phrase, signifying that growth will be subpar for an extended period, and that the old normal is no longer something to be expected?
It is possible, of course, that I am wrong and the prevalent pessimism is correct. Many economic indicators, including Thursday’s retail sales report, are looking up, but that does not prove the recovery will be self-sustaining. There are issues relating to over-indebted consumers and local governments. The housing collapse will have an impact for some time.
But there are, I think, a number of reasons for the glum outlook that are unrelated to the actual economic data.
First, the last two recoveries, after the downturns of 1990-91 and 2001, were in fact very slow to pick up any momentum. It is easy to forget that those recessions were also remarkably shallow. If you are under 45, you probably don’t have much recollection of the last strong recovery, after the recession that ended in late 1982.
Add to that the fact that the vast majority of the seers did not see this recession coming. Remember Ben Bernanke assuring us the subprime problem was “contained”? In mid-2008, after the recession had been under way for six months, the Fed thought there would be no recession, and the most pessimistic member of its Open Market Committee thought the unemployment rate could climb to 6.1 percent by late 2009. It actually went over 10 percent.
In January of this year — after the recession had probably been over for at least a few months — the most optimistic member of the committee expected the unemployment rate to fall to 8.6 percent by late this year. The consensus was for a rate no lower than 9.5 percent.
Having been embarrassed by missing impending disaster, there is an understandable hesitation to appear foolishly optimistic again.
But even without that factor, it is normal for recessions to make people pessimistic. “Go back and read what people were saying in 1982 or 1975,” said Robert Barbera, the chief economist of ITG. “Nobody was saying, ‘Deep recession, big recovery.’ It is quite normal to expect an abnormally weak recovery. It is also normal for that expectation to be wrong.”
Daniel Gross at Newsweek:
After the failure of Lehman Brothers in September 2008, industries and institutions tethered to the easy-money era were nearly sliced in half. And so was America’s economic self-esteem. Between the end of 2007 and the first quarter of 2009, $9 trillion of wealth evaporated. The relentless boom of China, India, and Brazil, with their cheap labor and abundant natural resources, emerged as a frightening new threat. The collapse coincided with other foreboding omens: $4-a-gallon gas, the rise of the tea partiers, an ungovernable Senate, an oddly blasé White House, unrepentant banks, and stubbornly high unemployment. The broad measure that tallies frustrated part-timers and those who have given up remains at 16.9 percent. If the U.S. doesn’t tumble back into recession, the consensus holds, we’ll face a Japan-style lost decade. A 2009 NBC/Wall Street Journal poll found that only 27 percent were confident their children’s standard of living would be better than their own.
Bleak is the new black.
But the long-term decline of the U.S. economy has been greatly exaggerated. America is coming back stronger, better, and faster than nearly anyone expected—and faster than most of its international rivals. The Dow Jones industrial average, hovering near 11,000, is up 70 percent in the past 13 months, and auto sales in the first quarter were up 16 percent from 2009. The economy added 162,000 jobs in March, including 17,000 in manufacturing. The dollar has gained strength, and the U.S. is back to its familiar position of lapping Europe and Japan in growth. Among large economies, only China, India, and Brazil are growing more rapidly than the U.S.—and they’re doing so off a much smaller base. If the U.S. economy grows at a 3.6 percent rate this year, as Macroeconomic Advisers projects, it’ll create $513 billion in new economic activity—equal to the GDP of Indonesia.
So what accounts for the pervasive gloom? Housing and large deficits remain serious problems. But most experts are overlooking America’s true competitive advantages. The tale of the economy’s remarkable turnaround is largely the story of swift reaction, a willingness to write off bad debts and restructure, and an embrace of efficiency—disciplines largely invented in the U.S. and at which it still excels. America still leads the world at processing failure, at latching on to new innovations and building them to scale quickly and profitably. “We are the most adaptive, inventive nation, and have proven quite resilient,” says Richard Florida, sociologist and author of The Great Reset: How New Ways of Living and Working Drive Post-Crash Prosperity. If these impulses are embraced more systematically and wholeheartedly, the U.S. can remain an economic superpower well into the current century.
So what will our new economy look like once the smoke finally clears? There will likely be fewer McMansions with four-car garages and more well-insulated homes, fewer Hummers and more Chevy Volts, less proprietary trading and more productivity-enhancing software, less debt and more capital, more exported goods and less imported energy. Most significant, there will be new commercial infrastructures and industrial ecosystems that incubate and propel growth—much as the Internet did in the 1990s.
Mike Dorning at BusinessWeek:
Bloomberg national poll in March found that Americans, by an almost 2-to-1 margin, believe the economy has gotten worse rather than better during the past year. The Market begs to differ. While President Obama’s overall job approval rating has fallen to a new low of 44%, according to a CBS News Poll, down five points from late March, the judgment of the financial indexes has turned resoundingly positive. The Standard & Poor’s 500-stock index is up more than 74% from its recessionary low in March 2009. Corporate bonds have been rallying for a year. Commodity prices have surged. International currency markets have been bullish on the dollar for months, raising it by almost 10% since Nov. 25 against a basket of six major currencies. Housing prices have stabilized. Mortgage rates are low. “We’ve had a phenomenal run in asset classes across the board,” says Dan Greenhaus, chief economic strategist for Miller Tabak + Co., an institutional trading firm in New York. “If Obama was a Republican, we would hear a never-ending drumbeat of news stories about markets voting in favor of the President.”
Little more than a year ago, financial markets were in turmoil, major auto companies were on the verge of collapse and economists such as Paul Krugman were worried about the U.S. slumbering through a Japan-like Lost Decade. While no one would claim that all the pain is past or the danger gone, the economy is growing again, jumping to a 5.6% annualized growth rate in the fourth quarter of 2009 as businesses finally restocked their inventories. The consensus view now calls for 3% growth this year, significantly higher than the 2.1 % estimate for 2010 that economists surveyed by Bloomberg News saw coming when Obama first moved into the Oval Office. The U.S. manufacturing sector has expanded for eight straight months, the Business Roundtable’s measure of CEO optimism reached its highest level since early 2006, and in March the economy added 162,000 jobs—more than it had during any month in the past three years. “There is more business confidence out there,” says Boeing (BA) CEO Jim McNerney. “This Administration deserves significant credit.”
Reihan Salam on Gross:
But does he gives us any reason to believe that this will happen? Have we curbed subsidies for homeownership? Have we curbed subsidies for the purchase of new automobiles? Will we see actually see legislation that bans or limits proprietary trading, would it be desirable, and would such legislation prove workable? My sense is that Neil Barofsky, quoted by Hart and Zingales in their National Affairs essay on curbing systemic risk, was right:
These banks that were too big to fail are now bigger. Government has sponsored and supported several mergers that made them larger. And that guarantee — that implicit guarantee of moral hazard, the idea that the government is not going to let these banks fail — which was implicit a year ago, it’s now explicit.
As for the more productivity-enhancing software piece, have we seen a sweeping effort from the White House to scrap software patents or to limit copyright terms, or have we seen an Administration that, like its predecessor, is eager to protect the interests of entrenched incumbents in this space?
Again, I like the Gross vision. But does he give us any reason to believe that it is coming to pass?
In the 1990s, Japanese policymakers deliberated and delayed before embarking on a program that included interest-rate cuts, a huge stimulus program, expanded bank insurance, and the nationalization of failed institutions. In 2008 and 2009 it took the United States just 18 months to conduct the aggressive fiscal and monetary actions that Japan waited for 12 years to carry out. And the patient responded to the shock therapy, as the credit markets and financial sector bounced back. Since the announcements of the Treasury-imposed stress tests in May 2009, banks have raised more than $140 billion in new equity capital. In August 2009, not even the most cockeyed optimists could have projected that within four months, Bank of America, Citi, and Wells Fargo would return $100 billion in borrowed funds to the taxpayers. But they did.
Is he arguing that the financial system is basically sound? And is it really safe to say that the enormous monetary and fiscal expansion we’ve seen over this period hasn’t actually exacerbated the downside risks of another sudden downturn? Jeffrey Sachs would disagree.
Gross’s essay does include one specific bit of information that I find very encouraging.
In the short term, the ruthless pursuit of efficiency translates into the uncomfortable—and unsustainable—dichotomy of rising profits and falling employment. But the focus on efficiency is creating new business opportunities for smart companies. At BigBelly Solar, a Needham, Mass.-based firm whose solar-powered trash compactors reduce the need for both labor and energy, sales doubled in both 2008 and 2009. “Cities and institutions like universities and park systems are eager to do more with less,” says CEO Jim Poss. Leasing 500 compacting units has allowed Philadelphia to cut weekly pickups from 17 to five and will save it $13 million over 10 years. BigBelly employs fewer than 50 people, but like many businesses in fast-growing markets it indirectly supports a much larger number of jobs.
This is the power of capitalism, I tell you! But is BigBelly Solar more representative of the economy that is emerging or the massive transfers to declining industries, the pressure on GSEs to originate mortgages of dubious value, modification efforts that amount to huge subsidies for the financial sector, and much else besides?
Ryan Avent at Free Exchange at The Economist:
The trigger for the stories is clear. Economic data have been trending upward for a while, but March’s positive employment report was the catalyst for this rush of pieces. And once out there, the “Americans are too pessimistic” meme takes on a life of its own.
By its self, the cheerleading isn’t necessarily a bad thing. Confidence is a key ingredient to recovery, and if Americans are convinced that it’s once again ok to spend and invest, then the confidence boost to the economy may feed on itself. But it’s worth pointing out that after meeting on Friday, the NBER recession dating committee declared that it was not prepared to announce an official recession end date. This doesn’t mean that the economy is still in recession; it could simply mean that they have not yet seen enough data to agree upon a date. But it should indicate that America is not that far removed from contraction.
And optimism could be dangerous if it leads the country to underestimate its continued vulnerabilities—to new financial shocks, to new shocks to household budgets (as from rising resource costs), to new deterioration in housing markets, to continued drag from an unemployment problem that remains very serious. At this point in any recovery, complacency is the enemy. All observers want this to be 1983, but it very well might turn out to be 1937.
But just off the top of my head, here are the things that gnaw at me when I hear stuff like this:
- This is a balance sheet recession, not a Fed-induced recession. Paul Volcker caused the 1981 recession by jacking up interest rates and he ended it by lowering them. That’s not going to happen this time.
- In fact, there won’t be any further stimulus from lower interest rates. They’re already at zero, and Ben Bernanke has made it clear that he doesn’t plan to effectively lower them further by setting a higher inflation target.
- Consumer debt is still way too high. There’s more deleveraging on the horizon, and that’s going to make consumer-led growth difficult.
- The financial sector remains fragile and there could still be another serious shock somewhere in the world.
- There are strong political pressures to reduce the budget deficit. That makes further fiscal stimulus unlikely.
- Housing prices are still too high. They’re bound to fall further, especially given rising interest rates combined with the end of government support programs.
- Our current account balance remains pretty far out of whack. Fixing this in the short term will hinder growth, while leaving it to the long term just kicks the can down the road.
- The Fed still has to unwind its balance sheet. That has the potential to stall growth.
- Oil prices are rising. This not only causes problems of its own, but also makes #7 worse.
- Unemployment and long-term unemployment continue to look terrible. Yes, these are lagging indicators, but still.
I don’t expect all of this stuff to be as dire as it sounds, and overall I suspect that we are indeed going to see steady if unspectacular growth over the next few years. But I’m not entirely sure of that, and these are the reasons why. Just thought I’d share.
If this happens, it would be consistent with the aftermath of past crises. The U.S. tends to bounce back more quickly from global shocks — including those caused by the United States.
What’s intriguing about all of this is whether a U.S. economic resurgence would affect American attitudes about the rest of the world. Afghanistan, Iraq, and the economic downturn have caused a lot of Americans to (understandably) grow weary of sustained engagement in other parts of the globe. If the economy turns around, a lot of attitudes about foreign affairs might become less sour.
Question(s) to readers: do you think the U.S. economy is primed for an supercharged recovery? If so, how will that affect attitudes towards American foreign policy?
It can’t be a coincidence that Newsweek and BusinessWeek both proclaim (with caveats buried deep within) that America is back, that the worst is over, that a bright future for the country is ahead. It’s not the analysis that troubles me, it’s the perspective from which that analysis is derived. It is absolutely true that the worst is over, and is absolutely true that way too many Americans are suffering, and will continue to suffer, much more than when similar headlines were written about the ending of other recessions.
Americans don’t think the economy’s getting better, and they’re not confident it will get better. That’s the governing party’s major political challenge for the midterms. It also produces a disjuncture between elite opinion, which is talking up the economy, and public opinion, which is living with it.
I think the authors of these pieces are talking to their friends at private equity firms and on Wall Street — where exuberance reigns — and aren’t talking as much to vice presidents at, say, General Electric. It’s harder to talk to corporations when they’re not performing well and still in cautionary/recession mode. So there are more sources available to reporters who will say good things about the economy than will say bad things.
Furthermore, those writing the articles may have had trouble refinancing their mortgage, but probably aren’t underwater: they have jobs, they aren’t mobile, so they are somewhat disconnected from the depth of economic duress. (Again, these articles include caveats, but they’re intellectual, not emotional — the authors don’t give much weight to the experiences that don’t comport with their own.)
The truth is that unemployment is massive and people have a myriad of challenges. Millions face their own private liquidity crises. The unemployment rate might rise between now and November as people dip their toes back into the job market and discover that it’s still way too cold.
In general, the economy we see today is probably the economy we’ll see in November. That creates a political challenge for the White House and Democrats: they desperately want credit for saving the economy, and they’re eager to participate in stories that play up the economy. The mental figurin’ is that if the status quo is the status quo, it’s be better to talk it up than to project caution.