Friday, October 7, 2011

What is the ‘New Normal’?—Part II

There is no reason we have to accept predictions of a slower growth ‘new normal’, as I said in a recent column, unless we react as the Japanese government did with too little stimulus spending until it was too late. Most pundits define the current slowdown as a growth recession mirroring the Japanese malaise that resulted in falling wages and prices from 1996 to the present, due mostly to massive debt accumulated during the bubble years.

Why not accept it? Firstly, Bernanke’s Federal Reserve just announced another bond buy back of $400 billion that will keep long term interest rates low for an extended period. Secondly, manufacturing and exports are still growing. It is true that personal incomes have been falling in line with declining employment, which is typical as businesses keep cutting their costs. But that also means no danger of inflation, as wages make up 70 percent of product costs.


And the economic indicators are improving, in spite of the euro crisis, political stalemate, falling stock prices, and the more than 16 million unemployed or underemployed? So it would take much less to stimulate more new normal growth, such as Obama’s $440 billion jobs bill presented to Congress.

So we can stimulate faster growth if we will all pull together, as Fed Chairman Bernanke so eloquently said in his latest congressional testimony: “Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy. Fostering healthy growth and job creation is a shared responsibility of all economic policymakers, in close cooperation with the private sector.”

Economic growth for the second quarter actually did end up stronger than previously estimated but remained anemic.  The Commerce Department’s final estimate for second quarter GDP growth was bumped up to a rise of 1.3 percent annualized, compared to the prior estimate of 1.0 percent annualized and to first quarter growth of 0.4 percent.  The anemic growth was due to declining incomes, which have been dropping since their high in January. This is what is being described as the ‘new normal’ for economic growth—i.e., not enough growth to keep up with population growth.


There is also some recovery in real estate, as construction made a comeback in August, largely from the public sector although major private components also gained. Construction spending in August rebounded 1.4 percent in August, following a 1.4 percent drop in July, and is in positive growth territory for the first time in more than a year. The rise in August came in much higher than the consensus forecast for a 0.2 percent decrease.


The latest month's rebound was led by a 3.1 percent jump in public sector outlays, following a 1.5 percent dip in July. Private residential construction spending made a partial rebound of 0.7 percent, following a 3.2 percent fall the prior month. Private nonresidential outlays edged up 0.2 percent after a 0.3 percent advance the prior month.
On a year-ago basis, overall construction outlays improved to up 0.9 percent in August from down 0.1 percent in July.

The ISM survey on overall non-manufacturing (service sector) activity is also looking better. Rates of monthly growth in orders are accelerating though employment is now contracting in what is a mixed report on the non-manufacturing sector for September. New orders rose a very solid 3.7 points to 56.5, over 50 to indicate monthly growth and well above August to indicate an accelerating rate of monthly growth. Backlog orders are now over 50, up five points to 52.5 to end three months of contraction. These are solid readings that point to rising overall strength for the sector in the months ahead.


Business activity, that is production, rose 1.4 points to a 57.1 level that shows the strongest rate of monthly growth in six months. Yet despite the rise in output, non-manufacturers are not hiring with the employment index falling 2.9 points to a sub-50 reading of 48.7 that indicates contraction in the sample's workforce. This is the first contraction in employment since August last year, and tells us that the service sector is not expanding fast enough to warrant more hiring.

And the manufacturing sector continues to improve, with employment and production up, but orders in the manufacturing sector flat at the very best, according to September data from the Institute For Supply Management. Its composite index came in slightly higher. The employment component rose two full points to 53.8 to indicate a tangible increase in hiring. This is in line with a tangible increase in production which rose more than 2-1/2 points to 51.2. One plus on the order side is a pick up in new export orders which rose two points to 53.5, signaling that exports are on the rise again.


What is the real reason for the current slow growth new normal that has continued since January? It could be that consumers haven’t paid down enough debt and are saving more, while incomes have been declining, as we have said. So to grow out of it more jobs must be created, and right now the rest of government isn’t doing its job to stimulate growth.


Harlan Green © 2011

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