It Ain’t Over until the Eagle GrinsPosted: February 20, 2009
Paul Krugman’s column in yesterday’s NY Times talked about the economic outlook report released by the Federal Reserve’s monetary policy ‘deciders’, the Open Market Committee. He’s been obsessing on one little sentence.
But my eye was caught by the following chilling passage (yes, things are so bad that the summarized musings of central bankers can keep you up at night): “All participants anticipated that unemployment would remain substantially above its longer-run sustainable rate at the end of 2011, even absent further economic shocks; a few indicated that more than five to six years would be needed for the economy to converge to a longer-run path characterized by sustainable rates of output growth and unemployment and by an appropriate rate of inflation.”
I used to participate every so often in the gleaning of the data for the Atlanta Fed’s report back in my days which were back in Greenspan’s days at the Fed. (Bill was President and all was well in the world, so completely different environment than now.) It’s a rather interesting exercise that combines the sweat of wonky economists dropping numbers into black boxes and anecdotal evidence gathered by holding meetings with business folk out in meeting rooms to gauge what’s going on in reality-based USA. The anecdotes we try to catch are things like: Are you hiring? Are you buying inventory? Are you expanding your business? What are your customers saying? How happy is every one in your city? You just basically chat them up after you’ve plied them with food and booze. We used to have the meetings at the Gulf Coast Casinos. I’m not sure what the other Feds do, but I’m sure I’d love to be around for some of them as the ones down here could be pretty interesting.
Each of the Fed Banks print their assessment of the economy. Some stick to their regions. Some have particular interests. For example, the St. Louis Fed is considered to be the center of the monetary policy wonks. San Francisco Fed tends to focus on issues dealing with the Pacific Rim. You can visit each of the sites and get a feeling for not only the country’s outlook, but the area where you live.
So, here’s the link to the San Francisco FedViews which is put out by their chief economist Sylvain Leduc. As you would expect, his worst news concerns the labor market. The SF Fed expects continuing bad news on both the number of unemployed people and on salaries.
We anticipate that, with the worsening labor market, the current recession will turn out to be the deepest in terms of job losses seen in 50 years. As of January, employment had contracted 2.6% from the December 2007 business-cycle peak, a little less than job losses posted in the 1981-82 recession. However, employment is expected to contract further, so that by the end of the recession, employment should have decreased by roughly 4% from December 2007. We have to go back to the 1957-58 recession to see a larger percentage drop in employment.
Leduc characterizes the labor data as “dismal” and basically does not forecast a change in the foreseeable future. The only commitment given is that ” behavior of jobless claims suggests that the unemployment rate will continue to rise for some time.” This alone should be enough to justify Krugman’s angst.
They characterize financial conditions as having “tightened recently”. The housing sector is said to be “continuing to plunge”. This is the brightest (if you can call it that) spot in the forecast.
We expect growth this quarter to contract sharply. Real GDP should continue to decline in the second quarter before recovering in the second half of the year. Nevertheless, the rebound in economic activity should be relatively modest compared with previous recoveries as households and firms rebuild their balance sheets.
This basically says that we may bottom out and flatten some where in the fall of this year. You’ll notice however, that he characterizes this as a modest rebound. This has led to speculation of a U.S. lost decade. The most interesting part of this analysis is that the SF Fed has tried to enter the stimulus plan into its forecast models. They believe the stimulus plan may lead to a trough some time in summer, but they are not anticipating much help for future growth. They also emphasize that it’s the spending portion of the stimulus plan that will help, not the tax cuts. (Something I’ve been emphasizing here for months). Remember that discussion we had about multipliers? Here’s your chance at checking your understanding!
- The recovery later this year will largely be based on the effects of a substantial fiscal stimulus package. Clearly, there is a lot of uncertainty regarding the impact of the fiscal stimulus. First, the effects will depend on when it is spent. Analyzing the fiscal stimulus proposal adopted by the House of Representatives in mid-January, the Congressional Budget Office estimated that only a little more than half of that $816 billion package would be spent in 2009 and 2010, partly because of delays in establishing new government programs. It is likely that similar delays will apply to the fiscal package expected to be signed into law.
- Second, the impact of the fiscal stimulus also will depend on how tax cuts and government spending affect the economy, an issue subject to debate. Our assessment is that tax cuts are somewhat less effective than government spending in stimulating the economy in the short run, since households typically save part of the increase in disposable income. This may be truer this time because the saving rate is increasing. In contrast, government spending initially affects GDP one-for-one since all of the funds are spent.
- Using the fiscal multipliers estimated by Macroeconomic Advisers, a private forecasting firm, we find that the fiscal stimulus package has a sizeable impact on our growth forecast, particularly in 2009. Moreover, we forecast that the unemployment rate would climb to nearly 10% absent the fiscal initiative. However, while the stimulus package will help reduce the slack in the economy, it will not be enough to bring a return to full employment.
The Fed President of Atlanta also sees a “modest recovery in the second half of 2009.” Dennis Lockhart gave the Atlanta Fed’s outlook in a speech yesterday in Birmingham.
With regard to his outlook, Lockhart said he expects unhealthy credit markets, an excess supply of houses and low business and consumer confidence will weigh on growth for the next several quarters. But he anticipates some factors suggesting improvement as the year progresses. These factors include a reduction of excess business inventories, lower mortgage interest rates helping housing markets on the margin, the fall of energy prices and the potential for improving consumer confidence.
Some time in February, Ben Bernanke will give the BIG semi-annual report that is akin to the President’s State of the Union Address. He’ll probably have more information on the TALF by then as well as some better indication about the performance of the stimulus and the expected impact of the housing and TARP bailout. This will be an important bit of testimony and I would suggest you watch for it. As for the economic omens, we still see the market testing a new bottom, credit cards appear to be the next big bomb, and the hedge funds appear to be the next endangered institute. Oh, and every one’s an amateur economist this days. Be careful out there!