America’s economy battles uncertainty, both home-made and imported
As recently as February payroll growth was running at 250,000 a month. Many of the headwinds that had held back growth for so long were abating. State and local government lay-offs have eased, and housing, though deeply depressed, has been reviving: both sales and construction of new homes are rising, as are prices, by some measures.
The abrupt reversal of mood recalls both 2010 and 2011, when a promising burst of growth in the early months petered out in spring and summer. Last year the culprits were obvious: Libya’s turmoil had sent petrol prices sharply higher, Japan’s tsunami disrupted supply chains, and over the summer politicians flirted with defaulting on the national debt.
The sources of this year’s weakness are harder to identify. Petrol prices are up, but by much less than last year. Other economic data have been mixed: gross domestic product grew by 1.9%, annualised, in the first quarter, and economists think it is growing a bit faster in the current quarter. Private surveys of purchasing managers showed both factory and service activity holding steady in May. And even as job growth has slowed, unemployment has trended lower. The slight increase in May, to 8.2% from 8.1% in April, was caused by more people bothering to look for work, a welcome reversal from previous months.
The weather is partly to blame. An unusually warm winter pulled forward some hiring that normally occurs in the spring. Construction employment, for example, rose by 45,000 in the three months through January, and has since fallen by 48,000. Inventories are another factor: firms appear to have slowed the pace at which they are adding to stocks in the current quarter. As those temporary factors fade, and as consumers get the benefit of a recent drop in petrol prices, job creation may still rebound.
Yet hopes that 2012 would be the year when America’s economy at last shook off its lethargy seem dashed. Employers and investors face increasing uncertainty in every big economy. China, India and Brazil have slowed sharply. The euro zone is dangerously close to collapse. Goldman Sachs reckons that the spillover of European stress into American financial markets will knock 0.2 to 0.4 percentage points off growth this year.
Meanwhile, tax increases and spending cuts equal to 5% of GDP a year are programmed to take effect around December 31st. Most analysts assumed this “fiscal cliff” would not be a worry until 2013. But economists at Bank of America, in a recent report, think it could become a significant drag relatively soon. The fiscal hit is huge, the date is set, and no resolution is in sight before the election on November 6th . This all gives firms a powerful incentive to postpone hiring and investment until the resolution is known. The bank sees a one-in-three chance of recession between now and mid-2013.
How the Fed might ease again remains unclear. It could promise to maintain interest rates near zero beyond 2014, its current commitment. Ms Yellen, however, suggested that that would have only a limited effect. Several officials favour more QE, the Fed’s most powerful tool, though some fret about potential side effects, such as rising commodity prices and a political backlash. The Fed could extend Operation Twist: the stash of one-to-three-year bonds it could trade for longer-term issues has dwindled, but it still has plenty of three-to-six-year paper. On the other hand, Macroeconomic Advisers, a consultancy, warns that selling such bonds could put upward pressure on consumer loan rates.
Then there is the question of what more bond-buying would achieve. Long-term Treasury yields are already down to 1.7%, near the lowest ever recorded. Yet while its tool-kit may be less powerful, at least the Fed seems able and willing to use it. The same cannot be said of either the euro zone or Congress.