Wake Up, Washington: The Economy Needs You
The voices of gloom and doom on the U.S. economy continue to add to their ranks, with more and more economists and financial forecasters lamenting the state of American affairs.
Federal Reserve Chairman Ben Bernanke offered rather mild comments to the Senate Tuesday compared with some others in his field, but even he seemed far removed from the person who told us about a rebirth in the spring of 2009.
"The U.S. economy has continued to recover, but economic activity appears to have decelerated somewhat during the first half of this year," he said in prepared remarks during his Semiannual Monetary Policy Report to the Congress. Bernanke noted that, after real gross domestic product registered an increase at an annual rate of 2.5% in the second half of 2011, that pace fell to a 2% climb in the first quarter of this year, "and available indicators point to a still-smaller gain in the second quarter."
In total, there's little debate that the world's biggest economy has struggled to show consistent progress from the steep downturn that began in earnest during the financial crisis of 2008-09. Jobs numbers of recent months above all else have kept concerns high about the nation's pace of recovery or lack of it. However, there are signs, albeit tepid ones, that the most brutal predictions are ignoring the positives.
One clear key for the months ahead and determining whether the next step is forward or backward rests with Washington, specifically the outcome of the November elections, the Fed's management of policies that support stability and the plans put in place by the White House and Congress.
At the moment, the economic direction doesn't seem to be trending in favor of President Barack Obama. "Declining confidence in the nation's economic prospects appears to be the most powerful force influencing voters as the presidential election gears up, undercutting key areas of support for President Obama and helping give his Republican challenger, Mitt Romney, an advantage on the question of who would better handle the nation's economic challenges," The New York Times wrote this week.
Polling by The Times and CBS News concluded that 55% of Americans don't approve of the president's economic management of the nation, whereas 39% do.
What Happens in Washington
Dr. Jerry Webman (@JerryWebman), the chief economist at OppenheimerFunds, said in an interview that getting clarity on the federal budget is probably necessary before a meaningful recovery will take hold and spare the country the fiscal cliff scenario, the popular term for the expiration of tax cuts and drops in spending that would occur without action.
"I'm worried about that, partially because I'm afraid we'll fall off of it," Webman says. In short, we're in a period of uncertainty, and investors, economists and business owners want to have a better idea of what will happen in the nation's capital.
IHS Global Insight chief economist Dr. Nariman Behravesh agrees that the leadership in D.C. needs to address the fiscal problems, and the sooner they do so, the better.
"The best thing that the new Congress and the new [or re-elected] president can do is reduce uncertainty" in several areas, namely around interest rates, taxes and policy, he says.
Bernanke himself addressed the murkiness, trying to press the case for Congress to get some type of agreement in place. "As is well known, U.S. fiscal policies are on an unsustainable path, and the development of a credible medium-term plan for controlling deficits should be a high priority," he said.
That lack of any real certainty is one of the reasons we've been treated to a spate of negativity this month alone.
One of the harshest views to make headlines came from economist Richard Duncan, author of "The New Depression: The Breakdown of the Paper Money Economy." Speaking on CNBC, he said, "there's a very real danger that we will collapse into a new Great Depression." He went on to speculate that if the world sees a significant credit contraction, "the depression could be so severe that I don't think our civilization could survive it."
Euro Pacific Capital's Peter Schiff, who has been warning about the deteriorating state of the U.S. economy for years, said on Breakout that he believes the country is on the way to a crash that will make the 2008 financial crisis seem like amateur hour.
Though these are among the more dire proclamations you'll run across in the daily press, a number of more measured voices are at least in agreement on the general direction of the economy. Pimco Total Return Fund manager Bill Gross said on the @PIMCO Twitter feed that the U.S. is "approaching recession." Bloomberg noted that Goldman Sachs and Deutsche Bank economists have reduced their second-quarter GDP estimates. Lakshman Achuthan, co-founder of the Economic Cycle Research Institute, told Bloomberg Television that the country is already in a recession.
Economist Nouriel Roubini said a "perfect storm" he's been concerned about was at hand. Then this week, the International Monetary Fund dropped its global growth forecast to 3.5% from 3.6%. The outlook for the U.S. was taken down to 2% from 2.1% in the prior survey.
Finding Signs of Improvement
"We started off this year so nicely, and then over the last three or four months, things really slowed down," Webman says. Even so, he says a stabilization in housing, which is of course key for many regular Americans, and better news in manufacturing are pluses for the economy.
"My view is to be kind of worried, but the slow growth economy is still pretty much in place," he says.
Behravesh, asked about encouraging aspects he sees in the economy, cites declining energy prices, both in natural gas and vehicle gasoline. On top of that, interest rates are at record lows, personal debt is falling, corporations are generating large amounts of cash and refinancing activity is picking up.
Though you don't have to look far to find Americans who are worried about getting work if they're unemployed or keeping their job if they have one, both Webman and Behravesh see at least some good in the labor market.
"There are actually a stunning number of jobs going unfilled in this economy," Webman says. "That's a human capital story." The Bureau of Labor Statistics reported earlier this month that the U.S. had 3.6 million open jobs at the end of May, compared with 3.4 million openings the prior month.
Behravesh notes that, in a recession, workers typically are cut. Right now, that isn't happening, but it's true that many employers aren't rushing to hire, either. "The reality is 92% of Americans have jobs, [and] 8.2% don't," he says. However, he also adds that the majority who are working certainly can be forgiven for worrying about holding the employment they've got.
For ordinary working Americans, the top worries are probably whether their homes are declining in value, whether more people are getting jobs than are losing jobs and whether prices of goods they need to purchase are on the rise, Webman says.
At the moment, "none of these is spectacular, but each is probably better than it is worse," he says. While it's tempting to say the economy's never going to be growing again, Webman argues the economy isn't stumbling as badly as some would say. "We are not in a recession," he says. "We are growing a little bit."
For the Fed, any new measures probably wouldn't be aimed at or even necessarily capable of jump-starting the economy, Behravesh says. Instead, they would be geared toward preventing the economy from getting worse.
"I'm not convinced they're out of ammo here," he says of the central bank. For instance, buying mortgage-backed securities would help keep rates down, and explicit inflation-rate targeting could also be employed.
Despite the Fed's extraordinary interventions over the past few years, more tools are available, Behravesh says, though the impact isn't guaranteed to be as pronounced. "One thing that is true -- the power of these subsequent rounds of quantitative easing becomes less and less."
