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Thursday, Aug. 26, 2010
Looking at a double dip
The U.S. economy is faltering. Consumer confidence is shaky and business uncertainty is rife, and the two create an ugly downward spiral. Worried about tomorrow's bottom line, companies refuse to hire. Fearful of being unemployed, consumers are tightening their belts. The result is a stagnant economy that threatens to bring about a "double-dip" recession that could drag the rest of the global economy down with it.
The U.S. consumer enjoys living beyond his or her means — and that same profligacy provides demand that keeps production lines humming around the world.
Despite the government's injection of hundreds of billions of dollars to goose the U.S. economy, demand is slowing. The most recent employment report, released last week, shows the third consecutive week of rising first-time jobless claims. According to the U.S. Labor Department, those claims rose 12,000 to 500,000. That is still below the peak recorded in March 2009, but the incremental increase is a sign that employers are again laying off workers. The national unemployment rate remains at 9.5 percent; The rate's not rising suggests that some workers are again dropping out of the job hunt — another indicator of an economy in trouble.
The U.S. economy grew 3.7 percent in the first three months of this year, but it slowed to 2.4 percent in the second quarter. There are worries that the growth will drop still lower to 1.5 percent in the second half of 2010. The problem is job creation: There isn't any.
Housing starts have slowed, and construction companies are letting workers go. The federal government had provided a temporary boost by hiring thousands of workers to conduct the census, but that is now over and those jobs are disappearing. As state and local budgets get tighter — blame falling tax revenues — those governments are also letting workers go.
The bottom line is that private employers added just 71,000 jobs in July while more than 200,000 government jobs were terminated, among them 143,000 temporary census positions. Yet, U.S. decision-makers seem more focused on balancing the books than stimulating demand. That might make sense with a budget deficit on pace to reach $1.3 trillion at the end of this fiscal year, but tightening purse strings when there is no other source of demand is a recipe for an economic downturn.
Japan knows well the results of such thinking: A fragile economic recovery was crushed in 1997 by an increase in the consumption tax when Finance Ministry bureaucrats tried to prematurely cut the country's swelling deficit.
In the U.S., long-term deficits are worrisome, but today's deficit hawks — the overwhelming majority of them Republicans — look suspiciously partisan. They were much less concerned about U.S. government finances when they were running up the bills. And their dogmatic insistence on the preservation of the 2001 tax cuts on the one hand and balanced books on the other undermines their credibility. In fact, it looks like their primary concern is ensuring that the Democrats have no economic accomplishments to claim in the runup to the 2010 November midterm elections.
If the federal government is not going to embrace Keynesian economics, then it is up to the U.S. Federal Reserve to pick up the slack. And since Fed Chairman Ben Bernanke is a student of Japan, action by the central bank should be forthcoming. At the last Open Market Committee meeting, held earlier this month, the Fed conceded that the pace of recovery had slowed and that growth "is likely to be more modest in the near term than had been anticipated."
But the Fed's steps have been modest. It has kept interest rates low but it has not done much to provide a stimulus. At its last meeting, it decided to use the proceeds from its holdings of maturing securities to purchase Treasury bills. That is essentially a holding pattern — it will not expand the money supply and not encourage spending.
Some economists claim that the problem is a divide within the Fed itself, with hawks worried about the prospect of inflation once the market begins to price the swelling government deficit. But long-term bond yields do not indicate any proclivity on the part of the market to do that yet. And the mere fear that that might happen does not mean that Fed members can ignore the other part of their mandate: employment.
The real danger is that the U.S. slowdown will percolate through the rest of the world economy. China's economy continues to pace the rest of the world, but even its blistering expansion is slowing. The new government in Britain has adopted a budget that slashes spending and could bring that economy to a halt as it adjusts to new realities.
The strength of the yen, a function of the interest rate differential between the dollar and the Japanese currency, threatens to throttle the nascent recovery here. Having reached a 15-year high against the dollar, the currency could undermine export competitiveness and exporters' earnings. A double-dip recession might not be the worst-case scenario.