A "W"-Shaped Economic Cycle? We Like "V" Better

Weekend press reports highlighted the continuing decline in payroll jobs in September – at 263,000, more than economists had forecast – and the still higher unemployment rate, now 9.8%. Was this a sign of renewed economic contraction? Many had thought that things were getting better. Are we to be disappointed?

After this report from the Labor Department last Friday, some observers are thinking that we may be in for a "W"-shaped business cycle. That is, perhaps economic activity had started to head higher over the spring and summer, completing a "V", but now has started back down again, so that we face a "double-dip", producing a W, with the chance for even worse conditions still to come. Such fears have already prompted talk in Washington of further government "stimulus" action to support the economy.

Right at the moment, we wouldn't actually be so terribly concerned. We have three caveats to offer in this discussion which point to a more optimistic scenario. First, the employment numbers face a quirk of the calendar that may be holding them back. The Labor Department collects this information at the same time every month, during the calendar week that contains the 12th of the month. And as you remember, Labor Day was very late this year, coming on the 7th, and this was during the employment survey week. This combination hardly ever happens – the last time was in 1998. Activities that begin in the autumn, such as schools, had started in many locations, but with the late Labor Day, not everywhere. So before we panic over a renewed economic downturn, we probably should wait to see what happens with the October figures. In 1992, for instance, the economy was struggling to come up out of recession and the September 7 Labor Day coincided with a weakening of employment and an uptick in the unemployment rate. Then, in October, these reversed: employment strengthened and unemployment eased. Asking for a month's patience may not sit well at present; people want to see continuous progress toward recovery. We may in fact have that, but it just may not be showing up right now in this long-established data collection system.

Second, many people claim that the $787 billion stimulus program enacted back in the spring hasn't worked. Despite this huge amount of money, unemployment has continued to rise far beyond what the Obama Administration predicted. But in actuality, only a little of the money has been spent yet; the federal government's Recovery.gov website tells that only a little over $100 billion of the money has been paid out, just one-eighth. This is a considerable sum, but it still shows that only a fraction of the stimulus work projects have actually been started.

For the portion of the stimulus that takes the form of benefits to taxpayers, some analysts fret that these consumers are saving the money rather than boosting their spending; this was especially the case with the 2008 tax rebates and has remained with this year's version. What a complaint!! One reason we got into this mess is that people borrowed and spent too much. Paying down debt and increasing saving is a very beneficial use of any extra cash we get a hold of. These remedial actions by consumers obviously don't lift growth when they happen, but they'll support it more assuredly going forward.

Finally, the economy was restrained over the summer by a renewed increase in energy prices, especially for gasoline. In and around New York, we were paying nearly $3.00 a gallon; this isn't 2008's $4-and-change, but still takes a chunk of our income to pay for it, limiting what we can spend on other things. The encouraging news in recent weeks is a reversal of some of that price hike and the lowest gasoline prices since May, according to the US Department of Energy. The result is the freeing up of about 1-1/4% of our "take-home pay". Since the continuing cuts in employment are preventing any income growth, this cut, even though it sounds small, is really important in supporting consumer spending on non-energy "stuff". Coming just ahead of the Christmas shopping season, this is no small matter. Indeed, two weekly surveys of chain-store sales both show some improvement in September, an encouraging sign.

We don't want to overstate anything here. Nor do we want to argue against at least one stimulus-related proposal, that to further extend unemployment benefits. This would be just the wrong moment to let lapse the special extensions that are already in place. But the caveats to a bearish outlook which we have just mentioned – quirks in the measurement of the employment data, more stimulus spending already in the pipeline and lower gas prices right now – suggest that the economy may not weaken again. Indeed, after a sinking spell last week, stock markets seem to be coming around to the same notion, with a combined two-day gain yesterday and today of more than 240 points on the Dow Jones, which recoups a sizable amount of losses last week. So let's not throw in the towel yet. The "V" shape recovery may still prevail over the "W" and more definitive progress may become evident "soon".