It’s Halftime in America … and We’re Winning
The overlooked data that reveal the economy is bouncing back.
The American economy’s been in bad shape for a long time. Normally after a recession you get a quick bounce-back recovery—real long-term economic growth is hard, but putting a bunch of unemployed workers back to work is, relatively speaking, easy. But instead of a catch-up recovery we spent 2010 and most of 2011 suffering from sluggish growth. Even before suffering though the deepest recession in postwar history, we had just ambled through the weakest period of growth on record. In retrospect, the boom economy of the late 1990s seemed less like the dawning of a New Economy and more like a brief bubble-driven vacation from decades of despair.
For the past 18 months, everyone’s been hatching pet ideas about what ails us. Technology is advancing too slowly—or maybe it’s too quickly. (My entry into the genre will be published next week.) All of that, however, obscures that the short-term picture is finally looking bright. Everyone knows the past couple of months’ worth of jobs data have been pretty good, but two relatively obscure data points released this week confirm that growth will be the hot new trend this spring.
Let’s start with theory. There are so many numbers out there that it’s easy to get lost in the fog. The fundamental case for growth in 2012 remains what I laid out last December. Normally, the Federal Reserve cures recessions with low interest rates. Mathematically speaking, to cure a very deep recession you need negative interest rates. There are exotic ways of accomplishing this (one particularly wacky option is to eliminate cash), but the Fed hasn’t wanted to do that. This means interest rates are inappropriately high, which dictates sluggish growth. But every time we have any growth at all the gap shrinks. That means growth should accelerate.
That’s why a decent November jobs report was followed up by a better December one and an even better one in January. But at the time there were a couple of flies in the ointment.
One was that we seemed to be experiencing the reverse of a “jobless recovery.” Rather than employment growth lagging behind economic output, the 2.8 percent annualized real GDP growth rate of the fourth quarter seemed way too small to have generated so many jobs. The second was that economic activity was increasing in the absence of growth in personal income. Americans seemed to be sliding back into the habit of indebting themselves in an unsustainable way.
These fears were debunked in an important release from the Bureau of Economic Analysis on Wednesday showing that growth in output and incomes last year had been faster than we’d thought. The media has an unfortunate habit of paying the most attention to the newest economic figures, because they’re new, rather than to the revised figures that come out later. More accurate information is, however, better information and often helps clarify these little puzzles. It turns out that the economy grew at a 3 percent annual rate in the last quarter of 2011 rather than a 2.8 percent rate, explaining some of the jobs mystery. But even better, personal income growth in both the third and fourth quarters was revised way upward, meaning that the personal savings rate is almost a full percentage point higher than had been initially estimated. The American consumer, in other words, didn’t close the year by spending at an unsustainable rate.
Another piece of excellent news came from Thursday’s auto sales figures, which showed a 14.1 increase in light vehicle sales from the previous February and a 6.9 percent increase from January.
Auto sales are highly correlated with employment growth, and these numbers imply that when the February jobs figures come in next week they’ll show the addition of more than 300,000 new workers. (Even if that proves overly optimistic, a considerably weaker figure would still be consistent with an accelerating recovery.) Plunging apartment vacancy rates and skyrocketing rents, meanwhile, count as further good news for the labor market since they should lead to an uptick in residential investment. February’s same-store sales figures are also indicating a nice rise in consumer spending.
In a presidential re-election year, it’s natural for the state of the economy to become politicized. Already the Obama White House seems to be reorienting its political pitch around a message of economic strength, while conservative media outlets are trying to pooh-pooh the inconvenient nascent recovery by touting bogus studies purporting to show that the “real” inflation rate is much higher than the official one.
The truth, however, is that the strengthening economy has as much to do with the Obama administration’s failures as its weaknesses. Better policy in 2009 and 2010—federal financial assistance to prevent state and local layoffs, or large-scale refinancing of underwater mortgages, for example—could have put us on the accelerating growth trajectory much sooner. Things are getting better now not so much because of any smart new policy ideas, but simply because politicians haven’t made any giant new screw-ups since last summer’s disastrous debt ceiling showdown. The key thing going forward is to keep that mediocre track record going. There are no guarantees in life, but whether Republicans like it or not, it’s now very likely that the economy will keep getting stronger in months to come no matter what politicians say, as long they don’t do anything dramatic to throw us off course.