Opinion pieces and speeches by EPI staff and associates.
[ THIS PIECE ORIGINALLY APPEARED IN TPM CAFE BLOG, ON MAY 11, 2007. ]
The signs are pointing toward recession
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Let me apologize in advance.
You log onto TPM for an intellectual caffeine jolt, and instead, encounter some bean counter with unsettling news about the economy. So if you want to click elsewhere, no harm, no foul.
Still with me? What are you, some kind of masochist?
Actually, I’m not here simply to report that storm clouds are gathering, though I’ll do that in a moment. What’s equally interesting is what this portends for people and politics.
First, among my dismal economist brothers and sisters, I tend to be somewhat upbeat—no Cassandra, me. So I hope I have some street cred when I tell you that there are at least three ominous signals about where we’re headed, economy-wise.
#1: First quarter gross domestic product came in at an already low 1.3%. That’s well below the rate we need to generate enough economic activity to keep jobs and incomes growing. But since that report came out, we have new information that will almost surely lead us to revise that measure down, including an unexpectedly large increase in the trade deficit and slumping retail sales (more on that later). Merrill-Lynch thinks first quarter GDP we be revised down to 0.7%, a mere crawl.
#2: We’ve discussed April’s lousy job growth numbers, and in that write-up I worried that weak job and income growth would restrain consumption growth, the one component of GDP that’s been consistently strong, well…
#3: Now we’ve got a couple of retail sales reports, reflecting that, as the NYT put it this AM: “rising gas prices and the flagging housing market are starting to weight on American consumers.” Some have tried to downplay April’s retail sales because of weather or holiday effects (Easter came in early this year, so people bought more jelly beans in March), but average March and April together gets you to a similar place regarding diminished consumer activity. As analysts and Moody’s economy.com wrote: “The 1.8% average for the two months is the weakest since November 2004 and is indicative of additional restraint from rising gasoline prices, weakening housing markets, deteriorating credit quality, and the onset of slowing growth in nominal labor income.”
One might note that sales at high-end Saks bucked the trend and were up big in April, and I suppose you could wonder how far the frothy stock market or the spending of hedge fund managers will get you right now.
My guess is: not too far. That wealth is highly concentrated and if the vast majority of families are starting to feel as squeezed as I think they are, it’s hard for me to see where the economy’s stimulus is going to come from moving forward. That’s one reason I was disappointed to see the Federal Reserve not take notice of these recent developments in their last statement on interest rate policy.
What might be some implications of all this?
First, if we do head into recession, look for politicians to start talking about Keynesian tax cuts to stimulate the economy. That could prove to be an interesting debate. The Bushies have no credibility on tax policy—they argue for them no matter what the state of the economy, and they target them largely in one direction: at the top of the income scale, the folks shopping at Saks.
Still, there’s is a good rationale for putting more money in people’s pockets when the engine of private sector growth is misfiring. Stay tuned.
Second, a recession could change the nature of the presidential campaign. The Republican candidates, though they distance themselves from the president, all pretty much embrace Bushonomics. That’s a tough case to make anyway, but it’s going to be especially tough in a downturn. Yes, you’ll hear all kinds of nonsense about how the recession (if there is one) is Clinton’s fault, but there no way around it: recessions hurt incumbents.
I hope I’m wrong. After all, we’re not in the woods yet (though if GDP has really slowed to about zero, we may be). I hope the housing slump evaporates tomorrow, wages start to beat inflation again, and job growth comes roaring back. But you heard it here: the signs are pointing toward recession.
Jared Bernstein is a senior economist at the Economic Policy Institute in Washington, D.C.
[POSTED TO VIEWPOINTS ON MAY 11, 2007. ]