Economy Lost Momentum

Economy Lost Momentum While I Was Pulling Weeds: Caroline Baum

Commentary by Caroline Baum

Aug. 10 (Bloomberg) -- The post-mortems on the July employment report made me realize I’d missed the recovery.

While I was watching my garden grow, the U.S. economy “lost momentum,” according to every news report I read or heard over the weekend. Somewhere between the budding of the peonies and the blooming of the rudbeckia, private-sector job growth downshifted.

One TV news moderator bemoaned the fact that businesses added 71,000 jobs in July compared with the 83,000 experts had expected -- as if an additional 12,000 jobs would have made the difference between Dow 10,654 (Friday’s close) and Dow 11,000.

The jobs count isn’t an exact science, and the Bureau of Labor Statistics says as much in a technical note accompanying each and every employment report. The “confidence interval” for the monthly change in private non-farm employment is plus or minus 97,000, according to the BLS.

What that means is, for a reported increase of 50,000, there’s a 90 percent chance the actual change would range from minus 47,000 to plus 147,000. This year, only the March and April private payroll increases of 158,000 and 241,000, respectively, are large enough to qualify as clear-cut gains.

When you throw in problems associated with seasonal adjustments and assumptions about new business formation -- the BLS’ birth/death model is relatively new and has little history at turning points -- one can’t draw any conclusions from two months of data.

Speed and Steroids

Which brings me to the point: In order to lose momentum, the U.S. economy has to have momentum to begin with. If it had any, I missed it.

What we had was a government-prescribed course of amphetamines (to keep it up), antibiotics (to prevent infection) and antidepressants (to make it feel better). It endured regular steroid injections from both monetary and fiscal authorities. And it still has no real muscle.

Inventory restocking isn’t a strategy for long-term growth. It’s an adjustment to the dramatic drawdown in 2009. When it’s done, it’s done, unless businesses and consumers are interested in investing and spending.

Inventory accumulation accounted for more than half of gross domestic product growth in the fourth quarter, three- fourths in the first quarter and a little less than half in the second quarter.

Ps and Qs

The Federal Reserve’s near-zero percent interest rates and $2.3 trillion balance sheet, almost three times its pre-crisis level, haven’t translated into growth in broad money and credit. Banks are holding $1 trillion in excess reserves in their accounts at the Fed. If policy makers want those reserves to be fruitful and multiply, they could lower the interest rate they are paying on reserves (currently 0.25 percent) or stop paying interest entirely. That’s just one option Fed officials will, or should, consider when they meet today in Washington.

For all the talk about quantitative easing, there is no Q in the Fed’s econometric models, according to Vincent Reinhart, a resident scholar at the American Enterprise Institute in Washington and a former director of monetary affairs at the Fed board. Instead the models are based on P (prices): the current and future expected short rate.

Putting reserves into the banking system has an effect on interest rates and is a channel for policy, Reinhart says. That’s a “different world view” than the one held by monetarists, which involves getting those reserves into the banking system.

Cashing In

On the fiscal front, the government threw huge sums of money at the economy. It paid people to buy cars and homes. It paid them to weatherize their houses, maybe the same ones the government paid them to buy. It paid them to buy appliances for the houses the government paid them to buy. And it paid banks to modify mortgages.

What did we learn from this exercise? That, by golly, if someone were planning to buy a home anyway, an $8,000 tax credit acts as an inducement to do it that much sooner!

So, yes, if the goal is to put money in the pockets of people who will spend it, as Democrats in Congress are wont to say, then the $862 billion fiscal stimulus has been a smashing, but not lasting, success.

Now what? The recipients of government largess buy goods and services, putting money in someone else’s pocket. That’s the Keynesian argument for more spending to stimulate aggregate demand.

Miles to Go

How does that tie in with the innovation and entrepreneurship that are the real source of job creation?

Hard to see how. President Barack Obama is working against himself and his party by bashing banks, insurance companies and energy producers in an effort to get his legislative agenda through Congress. That strategy has a populist appeal, but it’s not the way to win friends and influence people in the business community.

There is no quick fix, no painless solution, for what ails the U.S. economy. It took a long time to accumulate enough leverage and bad debts to sink the economy. It should take at least as long to recover.

The government is prolonging the adjustment by throwing good money after bad in housing, preventing prices from falling to levels that would encourage buyers. That’s one kind of momentum we can afford to lose.