Sunday, August 9, 2009

Federal Economic Policy: Winning the Statistical Battle, Losing the War?

The financial headlines are filled with proclamations of the stabilization of the financial system and the end of the recession. Prominent figures ranging from the President to the Chairman of the Federal Reserve to high profile analysts and economists working for investment banks that sell stocks all declare the recession in its last months. While most are cautious in predicting the strength of the economic rebound, they display growing certitude that the the economy is on the mend.

Yet, at the same time, all concede that unemployment is a serious problem, and that the unemployment rate might well rise above 10% next year. This past week, it fell to 9.4% in July from 9.5% in June. That sounds like an improvement, but less so when one considers that people dropping out of the labor force had a lot to do with the improvement. In other words, it was a product of the statistician's definition of being the labor force. You have to have made at least one attempt in the last 4 weeks to find a job in order to be considered unemployed. If your last attempt was 5 or 6 weeks ago, you're out of the labor force and not counted as unemployed even if you want a job. Thus, an increase in hopelessness apparently had much to do with last month's "improved" unemployment rate.

The housing market has shown a few glimmers of green shoots, with new home starts and existing home sales rising slightly in recent months, after falling by roughly 50% over the past year. But prices continue their downward trend in most markets. Last week Deutsche Bank analysts predicted that by 2011, about half of all mortgage borrowers would be underwater on their loans (meaning the mortgages would exceed the value of the home). If true, a vast number of homeowners (about one-third of all homeowners) would struggle with the question whether to abandon their homes rather than pay an above-market price. In many cases, neither discretion nor valor but expediency would probably be chosen. That wouldn't bode well for a rebound in housing prices.

Consumer credit is falling and the savings rate is up, which means that personal consumption is down. With the federally subsidized, bailed out, survival guaranteed big banks cutting back on consumer lending so that they can preserve their profitability and bonuses, and with rising unemployment coupled with falling real estate values, there is no hope for a major revival of consumer spending for years. This time, the little engine won't be able to, perhaps for a long time.

It appears that in Washington and New York, statistics are triumphing over reality. Government policy is producing an end to the recession, as technically defined. Federal bailouts, stimuli, Cash for Clunkers and other handouts appear in statistical compilations as economic activity adding to GDP. There is the minor irritation of Brobdingnagian deficits (which aren't subtracted from the GDP, even though for ordinary people borrowing detracts from wealth). But we shouldn't be tiresome. Instead, consider that government statisticians can measure the end of a recession from routinely gathered data. Further, the mainstream media gives a lot of coverage to a collection of pundits, analysts, officials and executives who compete with each other to make predictions. The ones who spot trends are deemed to be perspicacious; there doesn't seem to be much recognition that a lot of the time they're just dumb but lucky. It having become trendy to see light at the end of the tunnel, myriad favorable predictions are blossoming.

The stock market has celebrated. But when you get past easy commuting distance from Manhattan and the District of Columbia, the fact that a bad economy will soon stop getting worse isn't sparking a lot of champagne sales. Pay cuts, layoffs, falling home values, and credit line reductions all combine to put the chill on consumption. In an economy that is 70% consumer spending, that's toxic. What will provide the impetus for growth remains a very big question with no clear answer. We won't have much of a recovery if things simply stop getting worse.

We seem to be splitting into two economies--the statistically good economy, and the bad ground level economy. Recall the adage about lies, damned lies and statistics. The U.S. government, by spending trillions on big banks, billions on auto companies, and billions more on diverse and sundry stimuli, is producing a statistical end to the recession. But what comfort is that to the numerous Americans still trapped in the bad ground level economy?

No comments: