The half-full cup
“The economy grew in the first quarter, but not quite as much as originally reported, the government said Thursday.” That is how CNN.com opened its item yesterday reporting the second, and updated, estimate of GDP growth in the US in January-March. The sentence is factually correct and admirably balanced between the “good news” – the economy is growing at a reasonable rate – and the “bad news”, contained in the phrase “not as much as originally reported”.
That, in a nutshell, is where the American economy stands today, in terms of the hard data relating to its own performance. The flow of data is currently neither all good nor all bad, leaving the field wide open to conflicting interpretations. Obviously, if growth was less strong than had been thought, that is a mild negative. But far worse was the fact that the overwhelming expectation among analysts had been that the second estimate would be revised upwards, not downwards. In fact, only on Wednesday Goldman Sachs raised its forecast of the revised estimate, from an annual rate of 3.4% to 3.7% for the first quarter – as compared to the initial estimate of 3.2%.
The GDP data is especially important, because it relates to the entire economy. However, there is a steady stream of more narrowly focused economic data. Every Thursday, the number of new claimants of unemployment benefits the previous week is published. Yesterday, the data showed a drop of 14,000 for last week, from 474,000 to 460,000. Stated like that, it sounds positive – and so it is, as far as it goes, but that isn’t very far at all. Here’s how reporting hard data in one sentence can massively distort the picture, by giving only a small part of it:
First, the median expectation among analysts – for what that’s worth – was for a larger drop, to 455,000. Second, last week’s figure (relating to claims the week before) was actually revised up, meaning that things were actually marginally worse than originally thought. Finally, but most importantly, the absolute number – whether it’s 450,000, or 460,000 or even higher – is simply bad. If you go back to the end of 2009/ beginning of 2010 and read the forecasts for this year, you won’t find any mainstream analyst who thought that by this time the new claims for unemployment would still be in the 450-480,000 level. Even for a mild economic recovery, that’s way too high; put the other way, it means that there isn’t going to be an ongoing mild recovery, and the improvement recorded in late 2009 and early 2010 is likely to fade – as, indeed, the GDP data for the first quarter seem to be hinting.
When talking about economic recovery in the US, there are three things that really matter: employment, wages and housing. Employment is improving, but by nowhere near enough to really turn things round. The high weekly new unemployment claims is one indicator, the low number of new jobs being added is another – because it has to be seen in the context of eight million jobs lost in the recession, and an ongoing need for 150,000 new jobs every month, just to match the growth in the working-age population.
As for wages, the picture is unhappy here too. At the macro level, there is a parallel set of data to the Gross Domestic Product (GDP), called Gross Domestic Income (GDI), and these confirm the old story that in 21st century America, household income is not rising (in real terms). Bloomberg’s coverage of the data contains the following: “Today’s report also revised household earnings data covering the past two quarters. Wages and salaries decreased by $13.2 billion in the last three months of 2009, a downward revision of $30.3 billion.” People are not earning more, they are earning LESS. Companies are earning more profits – that’s why equity analysts are so happy – but people are not. The total disconnect between Wall Street and Main Street is not just media blather and blogosphere rage, it’s grounded in harsh reality.
Finally, there is housing. This week, data for April were published showing a sharp increase in sales of both new and existing homes. Good news? Not really. If anything, it’s almost meaningless. Once again, as happened last year, the government introduced a large tax benefit for homebuyers, which spurred activity – especially as the April 30 expiry date of this benefit approached. Many analysts believe that the cost to taxpayers of this benefit is not worth the marginal increase in overall activity in the housing market, but every economist knows, and last year’s experience in housing and autos proved yet again, that this kind of crude government intervention merely pulls forward buying into the benefit period, after which it drops back sharply. The underlying situation in the US housing market is at best grim, and probably dire; the Case-Shiller index of prices has turned down again in recent months, and a new wave of foreclosures is due in the second half of the year, when millions of adjustable-rate mortgages renew at rates far higher than the initial teaser offers.
In short, the US economy is currently experiencing a cyclical rebound, but this must be seen in the context of a much deeper, prolonged downturn. And that’s without even a mention of Europe and the threat of contagion…