Gloomy, Gloomier, or Gloomiest
12:00 AM, Jul 28, 2012 • By IRWIN M. STELZER
This week I offer a rather narrow range of choice of scenarios: gloomy, gloomier, and gloomiest, leavened only with a brighter after thought. The merely gloomy forecasts anticipate unsatisfactory growth but no recession. Analysts of this view advance three arguments.
First, we are living through still another summer of our discontent, those months in which the growth engine of the U.S. economy inexplicably takes a vacation before returning to work. Second, there are signs of strength in the economy. The housing sector seems to be recovering, although with stumbles along the way. Good earnings reports from such as Boeing and Caterpillar prove that there are some signs of bright amid corporate gloom. Led by such stellar performers, it is not beyond imagining that the economy will bumble along, growing at 2 percent later this year and into 2013.
Third, the monetary policy gurus at the Federal Reserve Board are sufficiently disturbed by weakness in the jobs market to give the economy another boost. Fed chairman Ben Bernanke will reach into his bag of tricks and announce new stimulative measures – “additional steps” is his preferred language – if not at the meeting of the Fed’s monetary policy committee next week, then at the August conclave of central bankers in Jackson Hole.
Since none of this makes much dent in unemployment, and since Europe is headed for what might be a deep recession despite the pledge of European Central Bank president Mario Draghi to “do whatever it takes” to save the euro, don’t break out the champagne. But neither should you panic.
The gloomier crowd says that the economy is stalled, that growth has not merely taken a summer vacation. GDP, which had grown at a 3 percent rate in the last quarter of 2011, increased by only 2.0 percent in the first quarter and 1.5 percent in the second, and will notch up still slower growth the rest of this year and next. The chief financial officers of the largest corporations plan to sit on their cash piles until the fog concealing future policy lifts. Small businesses won’t take up the slack, worried as they are about future health care costs and President Barack Obama’s promises to raise their taxes and, given the chance by voters, inflict who-knows-what-other costs on them. Only one in five small businesses say they will add jobs next year, and 82 percent say the country is on the wrong track.
This gloomier crowd tends to pooh-pooh talk of a resurgence in the manufacturing sector. Manufacturing output, which grew at an annual rate of 9.8 percent in the first quarter, managed only 1.4 percent growth in the second. Business investment, excluding volatile components, dropped significantly last month. Exports, an important source of recent growth, have slowed as Europe dips into recession, and the economies of China, Brazil and India cool. That decline in overseas sales, which is already hitting the profits of U.S. automakers and others, will accelerate as the dollar strengthens relative to the troubled euro.
Nor are forecasters of the gloomier persuasion cheered by the profits performance of some of America’s better companies. For every big-name winner, there is a big-name loser: earnings of Starbucks and even of mighty Apple disappointed the market. Many of the companies that did report satisfactory profits managed that feat by cutting costs rather than growing sales, and there is a limit to how much further costs can be cut. Frightened retailers, convinced that consumers will become progressively more skinflint as the weeks ahead produce more bad news, want to lure parents to their shops now. So they are already offering discounts and other inducements (free flu shots) to parents who have to equip their little darlings for a return to school at summer’s end.
Worse still, the gloomier say the merely gloomy are counting too much on a housing recovery. Despite record low mortgage rates, sales of both previously occupied and new homes fell in June to the lowest levels seen in several months, and the median price of new homes dropped by 3.2 percent compared with last year at this time. Credit standards are so tight that few can qualify for mortgages, and 11 million Americans owe more on their homes than those homes are worth – they are underwater.