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The US Federal Reserve is seen during a snowstorm March 3, 2014 in Washington, DC (KAREN BLEIER/AFP/Getty Images)

Five Years Later...

Irwin M. Stelzer

Five years ago this Sunday share prices hit a 13-year low: the S&P index of 500 shares fell to 676.53. Today it stands at 1,878.04, an increase of about 170 percent. Five years ago Sunday the unemployment rate stood at 8.7 percent, and was to reach 10 percent in a few months. Today, the unemployment rate stands at 6.7 percent. Five years ago this month builders received permits to build 513,000 homes; this month they likely will receive close to twice as many. Five years ago auto sales fell to a 27-year low of 10.4 million vehicles. This year sales will top that by some 50 percent.

Yet three out of every four Americans believe the nation is still in recession. With reason. Yesterday’s jobs report showed that the number of long-term unemployed rose last month to 3.8 million, below its peak but still high by historic standards. If millions had not dropped out of the work force in the past five years, the unemployment rate would be above 10 percent, higher than at the depths of the recession. And household incomes remain stuck at about their five-year-ago level when adjusted for inflation. Which accounts for the view of so many Americans that the recession has not ended. And that somehow things are out of control-fewer than one person in four believes the president is doing a good job, and only one American in ten is satisfied with Congress’s performance.

This is the shape of things when the president dropped his budget on congressional desks this week. Its call for an increase in taxes and in spending beyond the sums agreed to only a few months ago in the bipartisan spending bill worked out by Republican representative Paul Ryan and Democratic senator Patty Murray will go unheeded. So a government-led spending spurt and looser fiscal policy cannot be counted on to play a major role in offsetting the likely continued reduction in asset purchases by the Federal Reserve Board, the so-called tapering. Indeed, since Obama will not get his spending wish list, and since the deficit is declining relative to the size of the economy, fiscal policy might be a headwind to growth this year.

There are others:

  • Economy watchers say that the year-end inventory build-up presages slower production, at least in the first half of this year.
  • Activity in the service sector fell in January.
  • Market watchers worry that after a five-year bull run, historical patterns suggest that the bulls are about to leave the arena, and the bears to emerge from hibernation.
  • Those who follow the auto industry fear that February’s relatively weak performance is due primarily to a suspension of consumers’ demand for new vehicles rather than to the weather.
  • Housing analysts worry that the shift from a sellers’ to a buyers’ market early in the year reflects an enduring slowdown in the housing market.
  • Retailers worry that warmer weather will fail to reverse a recent sales slowdown.

Much is being made of the forecasting difficulty created by the storms that blanketed a good part of the country. The word “weather” appeared 119 times in the Fed’s survey of business conditions, published last week. That survey revealed that production in several regions was slowed by electricity outages and supply-chain disruptions. “It will only be in coming months, when the impact of the weather works its way out of the data, that a true picture of the underlying health of the economy is revealed,” comments Markit’s Chris Williamson.

That uncertainty has not deterred key forecasters from treating recent slow growth-an annual rate of about two percent-as the new normal, rather than as a temporary bump on the road to more rapid recovery. Larry Summers, the president’s first choice to replace Fed chairman Ben Bernanke, but shot down by the left of his party, muses that we may be entering an era of secular stagnation, a word once used to describe a no-growth economy in which demand is too weak to stimulate growth, but abandoned when the post-WW II economic proved to be far from stagnant. And Larry Lindsey, at one time as great a favorite of Republican president George W. Bush as Summers is a favorite of Democrat Barack Obama, suggests that every growth spurt will eventually be followed by below-average growth, producing a flaccid long-term average growth rate of a mere 2 percent. Top that off with a prediction by the nonpartisan Congressional Budget Office that in a few years “economic growth will diminish to a pace that is well below the average seen over the last several decades” and you have a non-partisan bit of angst added to those of a well-regarded Democrat, Summers, and an equally well regarded Republican, Lindsey.

Nevertheless, forecasting being a game in which the goal is less to get it right than to get one’s revisions in before the next guy, attention must be paid to recent contradictory data. The Institute of Supply Management says its index of factory activity rose in February after a January dip. January growth in durable goods orders and shipments “was better than expected,” according to Goldman Sachs, which also says new home sales “unexpectedly rose” in January, and that manufacturing activity in the Chicago area “was higher than expected” in February, proving that even the near-term expectations of economists can miss the mark. The Fed’s survey of the twelve Federal Reserve districts turned up eight reporting “modest to moderate” improvements in economic activity, two with no change, and only two, snow-stricken New York and Philadelphia, reporting a decline.

The Fed’s monetary policy committee will meet in ten days to try to make sense of these cross-currents. It will undoubtedly give heavy weight to Friday’s report that non-farm payrolls increased by 175,000 last month, well above the 84,000 and 129,000 recorded in December 2013 and January, respectively. The Fed, chairman Janet Yellen told the Senate, “is trying to get a firmer handle on exactly how much of that soft data can be explained by weather, and what portion, if any, is due to a softer outlook.” My guess is that she will conclude that when winter comes, spring cannot be far behind, and continue to reduce monetary stimulus in anticipation of increased activity in the next several months.

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