Skepticism and the Economy

The U.S. economy is trying to move ahead. There are grudging gains in the job market and existing home sales, and the broad measure of gross domestic product – GDP – grew at a 2.8% rate in the fourth quarter, the best since the middle of 2010. The stock market has generally been firming since the beginning of January and various surveys of consumer sentiment have been improving.

There remains an air of skepticism. Usually the rebound from a recession mirrors its force. Steep declines are followed by sharp gains, and more gradual contractions followed by gentler climbs. But this cycle has been marked by hesitancy. Consumer spending, for instance, picked up during 2010, but slowed again in the summer of 2011; construction of both buildings and houses has remained at very low levels. Business inventories of materials and merchandise seemed to be recovering but contracted anew in the middle of 2011. There have been fears of "double-dip", that is, of more recession after a string of lackluster gains in the economy.

Employment Conditions Improve . . . .
It's hard to pick this apart and identify a single pattern. People are most concerned about jobs and unemployment, and these have seemed to be moving favorably, if not forcefully so. We can take heart that businesses added some 466,000 jobs in the last three months of 2011, after an almost identical 465,000 during the prior three months. Many of those are in health care and food services, which may not be very high-paying. But 66,000 were added in manufacturing over that six-month span and 88,000 in professional and technical services, suggesting that a good portion of the new positions are better paying. The employment report for January will be out Friday, and all of this may change, although forecasters project some growth.

In addition, while the unemployment rate remains stubbornly high at 8.5%, the number of people filing claims for unemployment insurance has been coming down. So fewer people appear to be losing their jobs of late. There has historically been a break in labor market conditions whenever the number of these new claimants goes above or below 400,000 a week. More than 400,000 tends to happen only in recessions, while conditions are noticeably better below that threshold. So it is encouraging that ten of the last 12 weeks have been in a range around 375,000, including several weeks with the smallest numbers of new claims since the spring of 2008.

. . . . and Consumers Are More Confident
Economic data are fine, but do ordinary people, the backbone of the economy, actually notice these developments? If they're not the specific people involved in the hiring or other developments, their impact might not matter to other than data mavens. A survey of consumers taken by the University of Michigan suggests that people have indeed been aware. A boost to that survey's "index of consumer sentiment" has reflected in part a sense that employment opportunities might be improving; the overall index was up more than 5 points in January and is up 20 points from a low in August. The share of participants who said they are feeling better because they are hearing about companies hiring new workers was the largest since 1983.

But Worries Abound over Government Indecision . . .
Still, people remain skeptical. Other questions in the survey show that even though people have heard about new hiring, they don't expect that to produce much progress in lowering unemployment and they're also not optimistic about their own finances improving much. Further, the Michigan press release states that "confidence in government policies remains near an all-time low." Moreover, "every sustained recovery in the past half century has been foreshadowed by rising confidence in government economic policies."

Consumers are not the only ones concerned with the tenor of government policies. Another survey, this one a major undertaking by Harvard Business School and released just two weeks ago, describes considerable worry among business leaders. This new report has a lot in it and we will devote an entire article to it. Our main point for the moment is that several thousand business executives polled just in October cite concerns over various regulatory and tax issues that they see as potentially harmful to fundamental U.S. competitiveness.

. . . in Europe and the U.S.
Finally, today, as we have been writing, the stock market has moved down and up like a yo-yo once again. As we have talked about any number of times here, it continues that European policymakers still seem to have difficulty devising concrete actions to help the debt crises plaguing several countries there. Greek officials met on the weekend with bond-holders, and press reports suggested progress was being made toward an agreement on writing down some of Greece's debt so it could manage the rest. But no definitive conclusion was reached. Each time one of these meetings takes place involving various groups of European officials, it seems that some kind of resolution is about to be announced. But nothing definitive has yet resulted.

The U.S. has its own version of "policy-it is" too. The latest such development is an announcement that the Obama Administration is postponing the publication of its 2013 budget documents by a week. These "always" come out the first Monday in February, but this year, it will be the following week, on February 13. If this were isolated, it perhaps wouldn't matter much, but it follows the debt ceiling debacle and the downgrade of our credit over precisely such considerations.

These comments have no relation to one's political views. The immediate concern is that with the current tenuous state of the Western world economies, we need first of all for those governments to take clear and decisive steps. The private sector, as we have noted here, is trying to move forward. A number of emerging market countries are also moving forward. We need the policymakers in the Western industrialized countries to do what they are supposed to do, make the policies they are responsible for. Then skeptical consumers and uncertain business leaders can know what they face in conducting their own lives and businesses.