CQ WEEKLY
June 4, 2011 – 9:35 a.m.
Political Economy: Lowered Expectations
By John Cranford, CQ Columnist
From both the left and the right, verbal anxiety over the pace of the economy’s 23-month-old recovery, and particularly the state of the housing market, is becoming quite shrill. Since there is absolutely no chance that the folks on Capitol Hill might agree on a specific course of remediation, though, perhaps the rest of us ought to take a deep breath and review the evidence that things aren’t headed south in the proverbial handbasket — at least not yet.
Unfortunately, last week was of little help to those inclined to take a long view of the economy’s prospects. For investors, one of the most important indicators of the month signaled on Wednesday that manufacturers, the bulwark of the recovery so far, stumbled in May. That report came on top of one from Standard & Poor’s the day before, noting that house prices in a 20-city sample fell in March to an eight-year low.
A drop in both auto sales and consumer confidence added fuel to the fire, so stocks slumped. And Friday’s worse-than-expected jobs report for May sealed the fate of a brutal week.
The fact is, it’s going to be this way for quite a while — possibly years. The just-ended recession was quite severe by any measure, and the damage done to the financial system has doubled the pain and constrained the rebound.
Expectations for a rapid recovery appear mostly to be wishful thinking. And it’s likely that things will bump along for quite a while. It’s also worth remembering that volatility in stock prices is more a reflection of investor insecurity than underlying trends in economic performance. That means it’s as important not to overlook the positive signs as it is to focus on the trouble spots.
So, companies are still adding workers — 2.1 million new private positions since payrolls bottomed, in February 2010 — and the jobless rate, although higher in April and May, is still lower by a full percentage point than at its peak, in October 2009.
Applications for new mortgages are up for four of the past five weeks, evidence that potential homebuyers are coming off the sidelines, that existing owners have the equity to refinance and that lenders are willing to do their part. Yes, prices are falling, but the real low point for housing was in the spring of 2009. That April, figures from the National Association of Realtors showed a 16.8 percent drop in existing-home prices nationwide — the largest ever.
Wages and personal incomes continue to rise. And worker productivity — critical both to company profitability and to the American standard of living — continues to increase, although the pace of gain isn’t as rapid as that seen during the recession. Then, companies were firing workers and squeezing more output from every hour of labor. Now that companies are hiring, it’s only to be expected that productivity will be less robust for a time.
Public vs. Private
It’s not as if the U.S. economy is going to languish forever. Rather, absent some game-changing development, there is less potential for bang-up quarter after quarter growth than in the past. The basic building blocks are lacking, particularly given long-term structural weaknesses with education and investment that put the United States at a relative disadvantage to faster-growth economies.
We’re going to have to get used to a real rate of expansion that is less than the post-World War II average of 3.3 percent. Most economists recognize that, and are quietly building expectations for slower growth into their long-range forecasts. Both the Congressional Budget Office and the Office of Management and Budget expect that the after-inflation growth rate in the U.S. economy will be closer to 2.5 percent in the latter half of this decade. Between 2020 and 2080, CBO expects an average annual rate of real expansion of about 2 percent.
That reflects a maturing population and a maturing economy, and it isn’t necessarily a disaster in the making. But policy choices will need to reflect this longer-term trend.
In the short term, however, the problem is really that the foreclosure overhang still threatens the housing market, business investment remains subdued (even though companies are sitting on a hoard of cash) and the government — yes, the government — is a drag on growth. But not in the way you might think.
Political Economy: Lowered Expectations
The prevalent political narrative in Washington is that government is too big and spends too much. Republicans carry that a step further to say they want to reduce the size of government in order to allow the economy to grow. Regardless of the political merits of that argument, the economics don’t add up in the short run.
In the first quarter of this year, a decline in government consumption and investment subtracted more than a full percentage point from GDP growth. Two-thirds of that loss came from a cutback in war spending alone. One-third came from the continued contraction of state and local governments. While private payrolls are growing, government employment is down by almost half a million since its pre-recession peak.
There’s little sign that the trend will change. So, unless companies pick up the slack, it’s reasonable to expect that growth will remain tepid for some time. Only the political rhetoric will get hotter.