April 30, 2010
by Irwin Stelzer
Monetary gurus at the Federal Reserve Board -- technically, the Open Market Committee -- are not given to irrational exuberance. So when they say, "Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve," you can believe that things are really looking up for the U.S. economy.
True, the ever-cautious Fed also said that although household spending is picking up it is still constrained by "high unemployment, modest income growth, lower housing wealth, and tight credit." Two and perhaps three of these seeming negatives are in fact good news.
"Modest income growth" is a lot better than falling income; and "tight credit" is inducing consumers to use some of that increased income to pay off debt, and to fund their increased spending from money they are actually earning. This is the rebalancing of the economy away from heavy reliance on consumer debt that economists have been saying is necessary to the sustainability of the recovery and the long-term health of the economy.
"Lower housing wealth," although a shock to those whose mortgages exceed the value of their homes, is also not unambiguously bad news. It means that the housing bubble has finally been pricked, and the basis has been set for at least a modest recovery. Sales of existing and new homes are up, propelled in part by expiring tax credits, and house prices, although slipping last month, remain above year-earlier levels for the first time in three years.
With the usual caveats, among them the sensible warning that the housing sector remains shaky and still bears close watching, the Fed concludes, "... Financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in the context of price stability."
Consumers have similar expectations: Consumer confidence is at its highest level since the financial crisis wiped out a good part of their wealth in September 2008.
Reports from around the economy are putting flesh on those skeletal remarks -- and adding the sort of enthusiasm that sober central bankers necessarily eschew when they publish their outlooks. Orders for durable goods (excluding the volatile aircraft component) rose 4 percent in March following a 2.1 percent increase in February.
Caterpillar, the world's largest manufacturer of earth-moving equipment and therefore a good indicator of trends in the construction industry, reports robust earnings: Jim Owens, its chief executive officer, reports a sharp rebound in orders and earnings, and adds that neither his dealers nor his customers foresaw "the V-shaped recovery" that is now upon us.
Ford, which bet the company by mortgaging every asset it had in order to avoid the embrace of the government and be free to develop models consumers would buy, earned its fourth consecutive quarterly profit ($2.1 billion, its best in six years) and is expected to be in the black for the entire year.
The world's largest manufacturer of appliances, Whirlpool, rode sales increases of 65 percent in Latin America and 60 percent in Asia to a more than doubling of first-quarter net earnings, continuing the trend of overseas earnings increases reflected in the earnings reports of Apple and others.
But don't pop the champagne corks just yet. Lying in wait to ambush the recovery are the president's tax increases, the hidden costs of the health care "reform," an energy bill that is ready to be introduced, and a Congress seemingly determined to make a whipping boy of the financial sector. Not to mention a possible Greek-led economic collapse in Europe.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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