Friday, November 6, 2009

Things are Getting Better...Slowly

Despite the dismal US unemployment report, there are signs that the economy is stabilizing and even turning the corner, albeit slowly.

In Oregon, The UO Index of Economic Indicators rose again last month suggesting that the state is, along with the US, gradually coming out of the recession.

So how is the economy in the US overall. Well, there is a lot to be hopeful about, but still a number of cautionary signs which, to me, tell a story of recovery, but slow and 'jobless.'

Here is a look at some recent signs of US economic health:

Productivity growth soared in Q3, increasing at a rate of 9.5%. October retails sales in the US showed healthy growth as well. Initial jobless claims are decreasing and have been for a while, but are still high - suggesting that job losses will continue for some time yet. [And note that productivity soared with a cutback in labor utilization] Vehicle sales and home sales are up after having been spurred by incentive programs, so it is not clear that they will continue, but the programs have succeeded in staunching the bleeding in those sectors.

Credit markets have stabilized, but banks are still hoarding capital and focusing on investments rather then commercial banking so credit is still scarce. Today's Oregonian has a nice graphic showing how SBA backed small business loans have reduced significantly in the state (but, of course, it is not available on line).

Also, consumption spending, which had been recovering, took an unexpected fall in September as did real disposable personal income. Consumer confidence also dropped.

However, factory orders are up and inventories are down which is good news.

Some are now arguing that a new round of fiscal stimulus is needed to sustain, and make more robust, the recovery. I disagree. It may be true that more stimulus could be helpful, but I just don't think that we can accomplish it given they way it has been handled up to this point. Frankly, it is hard to spend that much money quickly and effectively. I thought the first round was so necessary that it was worth the tradeoff, I don't think that about the second. Perhaps if we were talking about block grants to the states...but even then I think the marginal positive impact of additional stimulus is now outweighed by the marginal negative impact of the additional debt necessary to fund it.

And, of course, unemployment is going to be the last thing to improve, so as today's unemployment report illustrates, things can be getting better but we can still see the worsening of the unemployment situation.


Chuck said...

It may very well be that increased debt due to a second stimulus might be not desired. Yet, why is government debt disparaged so often and business, financial, and household debt far less mentioned? Is there a difference in debt between sectors of the economy?

Patrick Emerson said...


Good question. My first response to this is yes for two important reasons: life cycles and investment.

Unlike government which lives on forever (or so we expect), individuals (and households) have natural life cycles whereby the high income years don't come until later in life. In order to make investments early, we often take on debt with the expectation that we will repay later in life (student loans, for example). Economists call this income smoothing - living beyond your means early and late in life and below your means in the prime working years. Government, of course, has no such cycles.

Also, as mentioned, much of the borrowing we see from households and businesses is to finance investments that are expected to pay off in the future and service the debt. Government spending sometimes has this aspect, but many times it is funding the normal public goods and services it provides.

That said, the more government spends on investments (education being perhaps the prime example) the more it looks like what private individuals do. And with the power of taxation, the ability to borrow is much easier (lower interest rates) and so an investment that does not make sense for an individual or company might make sense for a government.

Finally, one of the big worries about taking on too much debt is the fact that this could drive the expense of financing our debt and deficit spending up to uncomfortable levels. Currently, we are able to borrow at extremely low rates because we are about the safest place there is to park your money, but that could change if the economy flounders for a number of years and we have a very large debt burden.