The Federal Reserve has just released data on industrial production in September, and it wasn’t pretty. For the first time since the end of the recession in June 2009, factory output fell by 0.2 per cent – a disappointment compared to expectations of a small increase.
This is without doubt another round of ammunition in the belt of those officials on the Federal Open Market Committee who believe, without too many reservations, that an aggressive quantitative easing programme should get underway promptly.
The Great Recession of 2007-2009 hit hardest in two areas: sun-belt states such as Arizona and Florida that were exposed by the housing boom and bust, as well as rust-belt states like Michigan and Ohio that were already suffering from the erosion of America’s manufacturing base. Interestingly enough, Texas and the Midwest, which bore the brunt of the 1980-1982 recession, managed to escape most of the pain this time around.
The worst-off communities in this cycle were the focus of a conference this morning organised by the Brookings Institution’s Hamilton Project, which conducts research on economic policy and counts Robert Rubin, former treasury secretary, and Roger Altman, former deputy treasury secretary, as senior advisers.
At the next FOMC meeting on Sept 21st the committee will have to update its economic forecasts.
“Central bankers alone cannot solve the world’s economic problems,” Ben Bernanke said today in a speech that – had it not been so carefully phrased – would have been guilty of wilful optimism.
Stripping out the padding, for example, we can pull together one logical sequence from his speech:
Fiscal impetus and the inventory cycle can drive recovery only temporarily. For a sustained expansion to take hold, growth in private final demand–notably, consumer spending and business fixed investment–must ultimately take the lead… The prospects for household spending depend to a significant extent on how the jobs situation evolves… Incoming data on the labor market have remained disappointing.
And as for prospects for a revival next year, Bernanke’s assertion is quite damning in its timidity:
Despite the weaker data seen recently, the preconditions for a pickup in growth in 2011 appear to remain in place.
So, the necessary (but not sufficient) conditions for growth currently in place do not appear to be getting any worse for next year. Well phew.
Back in April when I planned my move to the US, August looked like a safe time to be packing boxes and dealing with utility companies. The economy was growing, the Fed seemed set to keep policy on hold for at least a year, and surely nobody would do anything in the heat of the summer anyway? So much for my skills as an economic forecaster.
I’m back to find the Fed reinvesting the proceeds from maturing mortgage-backed securities – after what seems to have been a pretty lively FOMC meeting on the 10th – with no change to the steady decline in the economic data.
What strikes me is how continuously bad the news has been in the last month, with no progress in the labour market, and series such as today’s new home sales still hitting record lows.
There were some very good presentations at the Monetary Policy Forum, organised by Fathom Consulting this morning, all of which highlighted what a difficult job the Bank of England’s Monetary Policy Committee has at the moment. Cogent arguments can be made both for loosening and tightening monetary policy.
Charles Goodhart, former Bank chief economist, MPC member and general guru, said that were he on the MPC now, he would wish he could do a Rip Van Winkle, go to sleep until 2012, and wake up once some of the uncertainty over the recovery is removed. Why? “Because the next year and a bit will be fairly horrific”.
The reason things look so difficult for monetary policy is that the outlook for the inflation-growth trade-off has worsened. When Fathom plug the latest data through their replica of the Bank of England’s main economic model they first find that the Bank seems to be seriously over-optimistic on growth as their chart shows.
Now, neither Fathom nor anyone else can accurately replicate the MPC forecasts because the published versions rest on judgments by the Committee members as much as the model’s outputs. But the argument put forward
I wrote a story in this morning’s paper on a survey that showed pervasive pessimism among American consumers about their economic situation.
71 per cent told AlixPartners, a business consulting group, that they were either worse off or in the same place as they were in May 2009 – and let’s remember that at the time the US economy was shrinking and the private sector was not generating jobs as it is now, albeit slowly, but was losing more than 300,000 positions per month.
The dispiriting survey by Alix caught my attention because it confirms that recovery is eluding most Americans, who are suffering from high unemployment and overleveraged household balance sheets. And the implications of this are huge: consumers are in no position to power the recovery once government stimulus stops later this year.
Money Supply – click for larger image
Last week’s dispiriting jobs report has led to pervasive pessimism about the state of the US labour market specifically and the pace of the recovery more in general.
So it was quite refreshing to see a research note land in my inbox this morning from Milton Ezrati, senior economist and market strategist at Lord Abbett, a fund manager, laying out the case why the labour market recovery is actually proceeding ahead of schedule compared to other recoveries.
Mr Ezrati’s argument is based on measuring this cycle’s labour market recovery with the average time that it taken a variety of labour market indicators to rebound after gross domestic product hits its trough during previous cycles.
It was a rough day on the economics beat here in Washington. Rough in terms of America’s hopes for a strong economic recovery, that is.
Let’s recap. At 8.30am, the labor department released its weekly jobless claim figures. They were up unexpectedly to 472,000. Back in April, when job creation seemed to gathering momentum, many economists were looking at the stubbornly weekly jobless claims data as an aberration. Eventually, the numbers would have to move closer to 400,000. But now, the opposite seems true and private payroll growth looks destined to be modest, with persistently high unemployment and therefore high jobless claims. We’ll know more tomorrow from the more important monthly government jobs report, but still, the labour market outlook is not rosy.
Then, at 10am, a double punch in the face. The ISM manufacturing index dropped a lot more than expected in June, suggesting that one of the bright stars of the recovery is beginning to fade. Most economists knew that after inventories were restocked, there would be some loss of momentum.
Who has the crisis hit hardest?
The 53m people (close to the population of the UK) who will remain in extreme poverty by 2015 who would not have had there not been a crisis.
And that wasn’t the grimmest of the World Bank-IMF Global Monitoring report.
“Although the recovery is underway the negative impact will be lasting,” said Delfin Go, World Bank lead economist, at a press conference.
Among the other impacts of the crisis:
- 1.2m additional children may die from 2009 to 2015.
- 100m people (three times the population of Canada) may remain without access to clean drinking water.
- 350,000 more children may not finish primary school.