Putting the Dismal Back in Econ

May 14th, 2014 at 11:33 pm

I’m hearing a fair bit of optimism re the current economy.  Many of the folks with whom I interact on this stuff are feeling better about where things are headed, with unemployment down, households looking pretty deleveraged, job growth at a decent clip, and the weather-beaten data flow improving.

As Mark Zandi wrote in his (invaluable) monthly macro report:

Awful winter weather, the expiration of the emergency unemployment insurance program, and slower inventory accumulation hurt growth at the start of the year. However, as their impact fades, the strength of the underlying economy is increasingly evident.

OK, I can see that.  And I don’t want to be the skunk at the garden party.  But in the interest of contrarianism, this seems like a good time to list some downside risks.  Feel free to add your own in comments.

–“Secular stagnation” or the idea of persistently weak demand.  Getting back to trend GDP growth, which discounting the near-zero print on Q1 GDP, is about where we are, is an insufficient new normal because we’re still stuck with large output gaps and high non-employment.

–Speaking of that, the steady decline in the labor force is another risk, both at the micro (um…working-age people need paychecks) and macro level (output growth=productivity growth + labor force growth).

Housing (which Zandi, who covers the sector closely, worries about as well in the report noted above) has slowed in recent months.  You can look at indicators like the huge slide in homeownership rates coming off the bubble or the historically low share of housing investment in GDP—around 3% versus an historical average a bit below 5%–and decide they’re poised to bounce back as there’s deep untapped demand for new household formation.  Or you can conclude that credit’s still too tight, mortgage rates are climbing, as are home prices (supply-constraints?), and connect these concerns to weak jobs and incomes among those not in the top 1%.

Fiscal headwinds are down but they’re not out, and Congress continues to block needed investment as well as help for the long-term unemployed.  In fact, the US Congress is a pretty worrisome economic risk factor.

Wages remain weak as I’ve shown in various places and dis-inflation is also a concern.

–Re that last point, we’re still stuck at the zero lower bound and the equilibrium real interest rate—the one we need to clear the investment market—is still below zero.  Since at the ZLB, the real rate is the negative of the inflation rate, dis-inflation—the fact that the core PCE is basically down from 2% to 1%–pushes in the wrong direction.

Inequality: Related to the weak wage growth point; remember, we’re still a 70% consumption economy; as long as growth eludes most households—and we’re talking about the ones with higher consumption propensities—consumer spending could stumble.

Euro/China weakness: Especially as the budget deficit has fallen quickly (fiscal drag), we really don’t need our trade deficit to expand.  It’s C+I+G+NX, and with G falling we don’t need net exports contracting.

Fed stumble or market overreaction: The market’s already been through a taper tantrum, so that’s behind us, but I recently worried that while Fed targets–inflation and job growth–seem somewhat less elastic to monetary policy, market reactions, from yields on bonds to international currency flows seem more elastic.  Or at least more skittish.  So there’s market risk as the Fed unwinds and ultimately lifts the funds rate off of the floor.

Like I said, the long winter may really be over and none of these will darken our economy’s doorstep.  But I’ll be watching out for all the above, just in case.

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10 comments in reply to "Putting the Dismal Back in Econ"

  1. Robert Buttons says:

    Inflation – Food up another 0.4% last month. That’s after a identical rise in Feb and Mar. Can already over stretched consumers afford 5% food inflation?

  2. Steve Roth says:

    “as long as growth eludes most households—and we’re talking about the ones with higher consumption propensities—consumer spending could stumble”

    Is this exactly the economic effect that you sort of debunked in a recent paper?

    • Jared Bernstein says:

      Good point. What I was thinking both there and here was that in the 2000s, e.g., mid-class consumption was strong amidst weak earnings because of wealth effects from the housing bubble. That’s not operative now, of course. Also, the concern of this post is not inequality, it’s aggregate growth.

  3. Tyler says:

    The U.S. government ran a big surplus in April. Additionally, through the first seven months of the 2014 budget year, the deficit totals $306.4 billion. That’s down 37 percent from the same period last year.

    The Congressional Budget Office is forecasting a deficit of $492 billion for the full budget year. That would be the narrowest gap since 2008. I think we’re right on track for a recession.

  4. Smith says:

    One is happy to hear about “households looking pretty deleveraged,” and I’m sure in the multiverse there exists a reality where that is so. But after spending five minutes googling I don’t see it. If I’m misinterpreting the figures, please let me know. How does anyone think debt levels aren’t historically elevated and pose a continuing risk to the economy, while feeding the bloated financial sector, the 1%, and draining resources, suppressing demand and preventing recovery. This is why secular stagnation talk arises ire, every word and letter devoted to it distracts from obvious issues which are inexplicably overlooked by erstwhile presumably progressive voices.

    “Consumer credit increased at a seasonally adjusted annual rate of 5-3/4 percent in the first quarter. Revolving credit decreased at an annual rate of 1/2 percent, while nonrevolving credit increased 8 percent. In March, consumer credit increased at an annual rate of 6-3/4 percent.”

    “115,000 foreclosure filings April 2014, down 20% from 2013”

    “Prior to the mortgage meltdown lenders and investors pretty much expected that .4 percent of all home loans would fail, that about 200,000 loans out of some 50 million would be foreclosed each year.”
    “According to RealtyTrac, 9.3 million homeowners were underwater in December 2013. That’s a huge number, but it’s surely better than the 12.8 million with negative equity in May 2012.”

    • Robert buttons says:

      The whole plan is to expand DEBT. The “aggregate demand by any means necessary” crowd is fixated on debt. This is not new. John Law tried it in 1720. I think it was 2002 when prof Krugman called for a housing (debt) bubble. Consumption without production (viz. debt) is the economic equivalent of perpetual motion and equally realistic.

      When the bubble pops, who will the aggregate demand-debt mongers blame this time?

  5. Dausuul says:

    For four years now, it’s been the same pattern: Green shoots in the spring, that turn brown by autumn. When we continue to have good economic indicators come October, then I’ll celebrate.

    • Robert buttons says:

      Ten or fifteen more years of disappointment and they MAY realize QE doesn’t work.

  6. Dave says:

    I think the president did a good thing by holding a meeting with young heirs of fortunes.

    Was it an admission that the government is less powerful than the rich? Yes. But it was true.

    Unfortunately, we now place our country in the good graces of rich people. Biology and statistics don’t bode well for this scenario. Rich people tend towards the sociopathic end of the spectrum.

    I think people are starting to wake up a bit. I’ve decided to go out on a limb and sound crazy to friends. I’ve begun to explain this to them. I’m starting with the ones that know I’m smart and sane. If I can convince them we need to mobilize, then I think I can move on from there to more diverse audiences.

    Going to the TV and the broad audiences doesn’t work anymore. The internet changed everything. So we deal with things as they are.

    My patent will be filed this month, and then I can change the world without fearing destitution. The world will be changed for the better. Either that, or I’ll die trying to make it happen. If I make a billion dollars, as a friend, please keep me grounded. It might happen. I said this to an old friend the other day.

    The US lacks community, and community is what I aim to create.

  7. Len says:

    “Congress continues to block needed investment”

    Come on, Jared, you know damn well it’s not Congress, but Republicans, who are primarily interested in making/keeping the economy as weak, as painful as possible as an election strategy through starving-the-beast budget cutting at all levels of govt. eg, Ryan’s budgets of “austerity for the 99%, wealth-extraction/protection for the 1%”.