The Silver Lining Within a Week of Grim Economic Data: View
Today’s jobs report from the U.S. Labor Department looks frightful. Private-sector employment has stalled, while state and local governments continue to shed jobs. Some 13.9 million people are out of work, and almost half of them have been unemployed for 27 weeks or longer. The unemployment rate, which had dipped to 8.8 percent in March, is back up to 9.1 percent.
Worrisome economic portents piled up all week: Housing prices in 20 major cities fell in March to the lowest point since 2003. Consumer confidence slipped. Growth in manufacturing, one of the economy’s bright spots in recent months, slowed. The recession ended two years ago, but you would never know it from numbers like these.
Reactions were swift and severe. “We are totally alarmed,” Service Employees International Union President Mary Kay Henry told CNBC. Economists at Barclays Capital Inc. reduced their second-quarter growth forecast to 2 percent from 3.5 percent.
As scary as it all seems, there are reasons to believe that May was an economic outlier. Floods and tornadoes of Biblical proportions struck the Midwest and South. Parts shortages stemming from the tsunami in Japan disrupted U.S. factories, especially those of Detroit automakers, which were forced to postpone hiring as a result. Fear of contagion from yet another European debt crisis rattled executives at multinational companies. Gasoline prices, at $4 a gallon and up, gave consumers an excuse to avoid the malls. Yet most of these forces are temporary. A resolution to the Greek debt crisis is taking shape. After peaking, the price of gasoline has dropped. Even weather-related damage will lead to spurts of economic growth as communities rebuild.
Give Bernanke Credit
So what is the appropriate policy response? First, Federal Reserve naysayers should acknowledge that Chairman Ben S. Bernanke was right. He has been making the case for months that the recovery isn’t secure and inflation isn’t a problem, and thus a very accommodative Fed policy is the correct path, including keeping interest rates near zero.
While the Fed isn’t likely to extend its second round of bond purchases past the scheduled June 30 termination, the central bank should hold off selling the $2.6 trillion in Treasuries, mortgage bonds and other assets it now holds on its balance sheet, and should keep reinvesting in securities as they mature. This will sustain some of the stimulative effect of earlier Fed purchases.
The White House and Congress, locked in mortal combat over the level of spending cuts required to win Republican votes to increase the debt ceiling, should also take note: The jobless figures are an unmistakable sign that the U.S. economy still needs strong government spending. Deep spending reductions should be postponed until 2013 at the earliest. An agreement on the debt ceiling would also have a calming effect on global markets and corporate executives. Lawmakers and the Obama administration should strike a deal now, and not wait until the August deadline.
For three years, corporate bosses have focused on shrinking their workforces to reduce costs. They are reluctant to hire unless they can be certain the economy won’t retreat. But U.S. companies are now sitting on $1.9 trillion in cash, and it’s time to put that money to work. Over time, American confidence will revive; it always does.
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