Bernanke Labor Pessimism Seen Misplaced as U.S. Expands in 2012
In his six years as Federal Reserve Chairman, Ben S. Bernanke has sometimes proved too sanguine about the U.S. economy, declaring the impact of bad subprime mortgages on the financial markets “contained” in 2007 and being too optimistic about growth last year. Now that employment is accelerating, economists wonder if the central bank again will prove to be mistaken, this time by being pessimistic about the outlook.
An improving job market, stepped-up U.S. bank lending and resurgent financial markets all could combine to boost demand. The jobless rate fell to the lowest level in three years in January, while consumer credit racked up its biggest two-month gain in a decade at the end of 2011. The stock market had its best January in 15 years, with the Standard & Poor’s 500 Index now up 6.8 percent since the start of 2012.
“The turn in the economy right now is very positive,” said Allen Sinai, president of Decision Economics Inc. in New York, who forecasts growth of 2.5 percent to 3 percent this year and a year-end jobless rate of 7.7 percent, compared with 8.3 percent last month. “We’re going to have a better year than a lot of people thought.”
Stock prices will continue to rise, as the strengthening economy boosts confidence among companies, consumers and investors that expansion is sustainable, said James Paulsen, who helps oversee about $333 billion as chief investment strategist in Minneapolis for Wells Capital Management.
‘Room to Run’
“We believe markets are still pricing in a more negative economic backdrop than what we are predicting,” Bob Doll, chief equity strategist at BlackRock Inc., the world’s biggest asset manager, wrote in a Feb. 6 commentary. That suggests stocks “have further room to run.”
Faster growth also would benefit President Barack Obama in his bid to win a second four-year term in November. Former Massachusetts Governor Mitt Romney, the most-likely Republican presidential nominee, has attacked Obama for his handling of the economy, charging that his policies have held back the recovery.
Texas Instruments Inc. (TXN), the second-largest U.S. chipmaker, is among companies rebuilding inventories and taking on workers ahead of an anticipated increase in orders.
“You see us already starting some level of hiring in the manufacturing operations,” Ron Slaymaker, vice president at the Dallas-based company, said at a Feb. 7 conference. “When demand returns, we’ll be able to start factories up pretty quickly.”
Investors More Confident
Corporate borrowers are selling bonds at the fastest pace ever, as evidence mounts that the U.S. economy is gaining strength and investors grow more confident that Europe is edging toward a solution to its sovereign crisis. Petroleo Brasileiro SA (PETR4) and AT&T Inc. (T) led $137.8 billion of offerings this month through Feb. 8, the best start to a month on record, according to data compiled by Bloomberg.
Even so, many economists are waiting for more proof before raising their forecasts. The U.S. will grow just 2.2 percent this year, according to the median estimate of private economists surveyed by Bloomberg this month. They project unemployment will average 8.1 percent in the final quarter.
Bernanke and his fellow policy makers also are more guarded than analysts such as Paulsen. The central bankers foresee growth in 2012 of 2.2 percent to 2.7 percent, on a fourth- quarter-over-fourth-quarter basis, and an average jobless rate of 8.2 percent to 8.5 percent in the last three months of the year, according to the central tendency of their January forecasts.
Bernanke called the economic expansion “sluggish” in testimony last week before the Senate Budget Committee in Washington and told lawmakers the decline in the unemployment rate veils weaknesses in the labor market.
The Fed has pledged to keep short-term interest rates “exceptionally low” at least through late 2014, provided inflation remains subdued and unemployment stays high. It reduced its target for the federal funds rate that banks charge each other on overnight loans to a range of zero to 0.25 percent in December 2008 and has held it there ever since.
Joseph LaVorgna, chief U.S. economist for Deutsche Bank Securities in New York, said policy makers will have to raise rates sooner because the economy will expand faster and joblessness will fall further than they project. The first increase will come in the second half of 2013, after GDP grows 3 percent this year and unemployment drops to 7.8 percent by the end of 2012, he predicted.
“The Fed has expressed insufficient confidence in the U.S. economy,” said Maury Harris, chief economist at UBS Securities LLC in New York, who reckons policy makers will begin raising rates by late 2013. “This could end up being an embarrassing episode in terms of their credibility.”
Sinai, who also sees the central bank raising rates by the end of next year, defended the Fed’s stance.
“It shows how seriously Bernanke takes the Fed’s mandate to achieve full employment,” he said.
Sinai credited easy monetary policy for the strengthening of the recovery he foresees, saying activity finally is responding to the “happy dust” the central bank dumped on the economy.
“If we’re going to err, we need to err on the side of providing too much support to the economy than too little,” added Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania.
Series of Shocks
At the start of last year, the economy also looked as if it was taking off, with payrolls rising by 827,000 in the first four months of 2011. It then was hit by a series of shocks: higher oil prices triggered by the Arab Spring uprisings, an earthquake in Japan, continued turmoil in the euro region and the debt ceiling standoff in the U.S.
GDP ended up rising 1.7 percent in 2011, below the 3.1 percent median forecast of private economists surveyed by Bloomberg at the start of last year and 3 percent in 2010.
Fed policy makers also proved to be too optimistic. In January 2011, they were looking for growth of 3.4 percent to 3.9 percent for the year. Bernanke in November blamed the shortfall in part on “some elements of bad luck.”
The risk is the U.S. could suffer a similar fate this year. The escalation of tensions with Iran over the Mideast nation’s nuclear program probably has added a premium of about $5 to $10 a barrel to oil prices, according to Robert McNally, a former White House official under President George W. Bush and president of the Rapidan Group in Bethesda, Maryland.
Higher Oil Prices
That could go higher, McNally said in a report last month for the Council on Foreign Relations in New York. Crude for March delivery settled at $98.67 a barrel on Feb. 10 on the New York Mercantile Exchange.
Meanwhile, European policy makers struggle to contain the region’s sovereign-debt crisis, and U.S. lawmakers remain at odds over fiscal policy. The economy would suffer a “significant blow” if Congress fails to extend a payroll-tax cut and unemployment assistance that are scheduled to expire on Feb. 29, Zandi said.
“I would be very enthusiastic about recent economic data if we hadn’t had last year’s experience,” he said.
Still, the U.S. may be better positioned than it was in 2011 to cope with surprises.
“Economic shocks and headwinds are always a risk, but we have over an additional two million private-payroll workers on the job, and it is their spending that cushions the blow from any unforeseen event,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.
Improving employment prospects are lifting confidence. The Bloomberg Consumer Comfort Index climbed in the week ending Feb. 5 to a one-year high, according to the latest figures.
Households also are benefiting from increased credit. Consumer borrowing rose $19.3 billion in December to $2.5 trillion, after a $20.4 billion advance the prior month, according to the Fed, the biggest back-to-back gain since 2001. While much of the boost came in the form of student loans, credit-card debt and car loans also rose.
“Consumers are loosening their belts as mortgage refinancing is putting more money in their pockets” and “the labor market is improving,” Sherry Cooper, chief economist at BMO Capital Markets in Toronto, wrote in a Feb. 9 note.
Accelerating Vehicle Sales
Automakers sold new cars and trucks in January at the fastest pace since the 2009 “cash for clunkers” program, without having to resort to profit-sapping discounts. U.S. light-vehicle sales accelerated to a 14.2 million seasonally adjusted annualized rate from 13.6 million in December, according to AutoData Corp. in Woodcliff, New Jersey.
“We’re looking at 2012 with some degree of optimism,” Sergio Marchionne, chief executive officer of Chrysler Group LLC and Fiat SpA, said on a Feb. 1 conference call.
More consumers were favorably disposed to buying a vehicle in early February than at any time during the past year, according to a Thomson Reuters/University of Michigan survey released Feb. 10, with more citing easy credit and low interest rates as reasons than at any time since 2005.
The surge in the stock market also is playing a role, Sinai said, boosting the asset side of household balance sheets and encouraging consumers to take on more debt. That’s helping to feed the cycle of increased spending and hiring, he added.
“If we have a little bit of luck and if policy makers don’t misstep, it feels like the dynamics of the economy are turning very positive,” Zandi said.
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