Looking up

The economy and stimulus

The economy makes headway. So do efforts to renew stimulus

WASHINGTON, DC | from the print edition

THREE months ago Barack Obama was firmly in the dock over news that no net jobs were created in August. Some gloomy people even saw a double-dip recession on the way.


America, it turns out, was not on the verge of recession, and it still isn’t. Subsequent revisions show that 104,000 jobs were in fact created in August. Later months have also been revised upwards, and in November payrolls grew by 120,000, or 0.1%. On December 2nd the government also reported that the unemployment rate had declined sharply to 8.6%, the lowest figure for two-and-a-half years, down from 9%.
November, it seems, was a very good month. Retailers reported solid sales on and after “black Friday”, the day after Thanksgiving on November 24th that marks the traditional start of the Christmas shopping season. Car sales were at their strongest since the days of the cash-for-clunkers subsidy programme, back in August 2009. Mortgage applications also ticked sharply higher.
The American economy is looking up in large part because it has been down for so long. The recent run of good economic data suggests that the economy is growing at around a 2.5% rate, roughly its long-term trend. That is fast enough to create jobs for a growing population, but not fast enough to reduce unemployment. Instead, the unemployment rate fell in November thanks to two unusual factors. First, the household survey, used to calculate the unemployment rate, has lately been recording stronger growth than the separate, better-known payroll survey; why, is unclear. Second, and more gloomy, a lot of people have left the labour force, reducing the number who are counted as unemployed. The share of working-age people in the labour market has fallen since the recession ended, holding the unemployment rate down for the wrong reasons.
A stronger recovery would probably have begun this year but for a run of bad luck: a rise in oil prices following the Arab spring, disruptions to global supply chains caused by Japan’s earthquake, and the deepening debt crisis in Europe. But part of the problem was self-induced. Anxiety among investors rose in August when a stand-off between Mr Obama and the Republicans in Congress almost forced the government to stop paying some of its bills and prompted the first-ever downgrade of the nation’s credit rating.
In the aftermath, the president saw his approval ratings slump: but approval of Congress fell even more, at one point going into single figures. That seems to have scared both sides into avoiding further confrontation. Fears that the government might shut down on December 16th over funding disagreements are fading; Congress has passed three appropriations bills and is closing in on the remaining nine. More important, Republican leaders have indicated that they would like to extend both a 2% payroll-tax cut and the availability of up to 99 weeks of unemployment benefits. Both were part of a compromise agreement a year ago and are supposed to expire at the end of this year.
The disagreement is over how to pay for the extensions, which JPMorgan reckons are worth $160 billion next year. Mr Obama and Senate Democrats would like to expand the payroll-tax cut and finance it with a surtax on millionaires over the next ten years. The Republicans are using their filibuster power to block that but getting no further with their alternative, which would cut the ranks and pay of civil servants. Some Republican legislators oppose any extension because of the impact on the deficit.
The posturing will inevitably continue for a few more days, but compromise seems likely. With the euro zone probably already in recession, America will struggle to maintain even its current modest pace of growth next year. With another self-induced wound, last August’s forecasts of a seasonal recession would turn out to have been early rather than wrong.