Monday, June 6, 2011

Is the Economy Faltering? The Trend is Not Great


Years ago, when I attended the University of Michigan, I had the chance to hear Paul McCracken speak.

Mr. McCracken had been chairman of the Council of Economic Advisors under President Nixon. He also served as an economics advisor to Presidents Kennedy, Johnson and Ford. In other words, he was a important player in developing economic policy throughout the 1960's and 1970's.

It was a real treat for a fledgling business student like me to hear from someone like Paul McCracken, so I remember his talk to this day.

One of the main things I recall was McCracken's distrust of economic forecasting, in particular econometric modeling. Instead, to get some sense of the health of the economy, McCracken used to wander down to the department where they actually compiled the data.

McCracken said that the folks that compiled economic data from a wide variety of sources were usually the best equipped to judge economic trends, since they spent most of their working hours gathering and preparing reports.

I remembered Professor McCracken's words this morning, when I read an article in the Financial Times that highlight the concerns that Keith Hall, commissioner of the U.S. Bureau of Labor Statistics, raised about the recent trends in economic data.

In particular, the jobs report last Friday was dismal. The U.S. only added 54,000 jobs in May, well below this year's average gain of 182,000. While it is only one month, the overall trend is well below what one would like to see in an improving economy.

Here's an excerpt:

Some analysts suggest that the {employment} slowdown might reflect supply chain disruptions or extreme weather events such as the tornadoes that hit the U.S. in May, rather than any deeper slowdown.

But Mr. Hall said this is hard to see in the data. "There was really no jump at all in people reporting work disruption. So whatever has happened this month is probably not a weather effect."

FT.com / US / Economy & Fed - US data chief warns on employment

Many Wall Street analysts have been quick to point out the similarities between this year and 2010. Last year, the economy also showed signs of faltering in the spring, yet we ended last year on a fairly strong note.

However, I worry that this year might be different.

Last year's fourth quarter growth spurt was helped by a number of factors that probably will not be repeated this year.

In particular, the second attempt by the Fed to lower interest rates was announced in late August, and asset prices jumped. In addition, in the aftermath of the November elections, Congress passed a number of tax cuts which were intended to spur consumption and investment.

This year, however, the mood in Washington is different. I doubt that even Bernanke has enough political capital to begin a third round of quantitative easing. And with most of the tax in Congress about cutting spending, and raising taxes on wealthier Americans, it is hard to see a significant dose of fiscal stimulus any time this year.

And so I am heeding Professor McCracken's words, and focusing on what the data is telling us.