Ambiguous economic chart. (Photo by Daniel ROLAND/AFP) (Photo by DANIEL ROLAND/AFP via Getty … [+]
AFP via Getty Images
If you listen to the White House, you’ll hear the economy is strong. Others will tell you that it has already slipped into recession. Such “analytical” differences are almost always common, and almost always reflect the speaker’s political agenda more than any simple reading of the statistical evidence. These days things look more ambiguous than usual. Statistics provide ammunition for both views. The President can point to robust payroll growth, and he does. Those less optimistic can point to two consecutive quarterly declines in the country’s real gross domestic product (GDP), among other things. While the balance of evidence clearly points to a flagging economy, it must also be acknowledged that the statistics paint an oddly mixed picture.
The Department of Labor’s Monthly Employment Report illustrates this. On a positive note, the July survey of employers showed a notable increase in payrolls by 528,000 jobs. Private payroll expanded by 471,000 jobs. While these are not record increases, they are still ahead of most historical experience and well above consensus expectations. But in the same report, the survey of households showed that jobs rose by just 179,000 in July. This tells a very different story than the employers’ balance sheet. Not only was the job gain much smaller, but it was not enough to offset the June job cuts, leaving the nation with about 136,000 job cuts over the two months of June and July through this measure.
Despite this contradiction, which has not yet been resolved by the Department of Labour, the flow of information from elsewhere and from the rest of the Department’s monthly report is tipping in the negative direction. While the unemployment rate fell slightly from 3.6% of the labor force in June to 3.5% in July, the ministry also reported that about 538,000 people retired from the labor force in July. Since they are neither working nor looking for work, this movement is more than responsible for the drop in the unemployment rate. In addition, the average weekly working time remained unchanged at 34.6 in July, still lower than in April.
Outside of the Labor Department’s accounting, of course, there’s the fall in real GDP in Q1 and Q2, the precipitous drop in consumer confidence, and the Institute of Supply Management’s (ISM) reporting of an overall slowdown and an outright drop in new orders for the measure. This list of negatives is of course far from exhaustive, but it is indicative nonetheless.
Aside from the latest statistics pointing to an economic slowdown, two other considerations weigh heavily on the outlook for the economy. One of them is persistent inflation. Most recently, the Consumer Price Index (CPI) rose 9.1% yoy in June. This price pressure is likely to continue. Even if it slows down a little – say to 8% or 7% – it will be enough to hurt the prospects for economic growth, by eroding business and consumer confidence and discouraging the saving and investing on which economic growth ultimately depends . These effects alone could lead to a recession. It certainly wouldn’t be the first time in history that this would be the case.
An even greater threat of recession comes from the Federal Reserve’s (Fed) fight against inflation. The Fed began this effort last March. Previously, it had pursued an inflationary monetary policy. It had kept short-term interest rates near zero and pumped new money into financial markets by buying bonds outright — mostly Treasuries and mortgages — a practice the Fed calls “quantitative easing.” But since the policy change in March, the Fed has been pulling money out of financial markets by selling hoarded bonds it had previously purchased, raising short-term rates by about 1.75 percentage points. While these are standard anti-inflation measures, they also stunt economic activity. Moreover, the Fed appears poised to take further steps in this direction over the coming weeks and months – a pattern that will make a recession even more likely.
If that assessment is correct – and it seems likely – then the statistics on which the optimists – including the White House – are relying will turn negative in the coming months. The evidence of economic weakness, if not recession, will be overwhelming. Whether this dissolution of the economic picture will take place in the next month or two remains uncertain, but it is unlikely that the ambiguities will persist for very long.
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