Rear-View Mirror Can't Forecast 2011 Economy: Caroline Baum
It’s starting to look a lot like 2010.
That’s what many analysts concluded based on a series of weak economic reports last month. News that the U.S. economy expanded at an anemic 1.8 percent rate in the first quarter compared with 3.1 percent in the fourth seemed to solidify the view that, like last year, the economy was slowing.
That reaction was unwarranted. Last week’s upbeat news on April employment is only one reason to eschew the idea of 2010 redux.
Another stems from incongruities in the gross domestic product report. The 1.8 percent increase in real GDP doesn’t jibe with other information, including company reports on first- quarter profits and individual income tax withholding receipts.
“Excluding autos, real GDP was up 0.4 percent,” says Joe Carson, director of economic research at AllianceBernstein in New York. “How is that possible with year-over-year operating profits up 20 percent?”
Profits come from production of goods and services. Theoretically, output should equal the income from that output, or gross domestic income, which includes profits, wages and rents. In reality, it doesn’t, which is why the Bureau of Economic Analysis adds a line in its GDP report for “statistical discrepancy.”
The BEA won’t report its measure of corporate profits until later this month, along with its revision to first-quarter GDP. The implied increase of 6 percent year-over-year, which Carson extrapolated from the GDP report, is well shy of what companies are reporting.
Carson found a few other statistical discrepancies in the GDP data. Investment in non-residential structures fell an annualized 21.7 percent, which was a much bigger decline than implied by monthly reports on employment, production and shipments and is likely related to bad weather.
“If it’s transitory, it has to come back,” he says.
What’s more, the reported 8.1 percent decline in nominal defense spending last quarter defies the BEA’s own estimates of a 13.8 percent increase as translated from proposed budget expenditures into a GDP framework. (Maybe the plus sign got lost in translation.)
Together, the two components -- defense and non-residential structures -- subtracted 1.3 percentage points from first- quarter growth, according to Carson, turning what would have been a respectable quarter into a lousy one.
There are more reasons to think 2011 won’t repeat 2010’s start-stop pattern. While very little of the Fed’s bond-buying has spilled over onto the broadest measure of the money supply, M2 rose at a 6 percent annualized rate in the last three months. A year ago, M2 showed no growth. Even though bank credit still isn’t expanding, banks at least eased credit terms in the first quarter, according to the Federal Reserve’s senior loan officers’ April survey.
Withheld income tax receipts are running way ahead of last year, up 17 percent in the fourth quarter and 12 percent in the first, according to Carson. Taxes aren’t withheld on income that isn’t earned.
Finally there are the waning effects of “fiscal stimulus,” or government spending by another name. Since one dollar can’t be spent by two entities at the same time, government spending can only substitute for private spending. Any resulting increase in GDP is temporary.
Even the government acknowledges as much by referring to money given to individuals in the form of unemployment compensation or Social Security benefits as “transfer payments.”
And that’s exactly what they are. The government, through borrowing or taxation, transfers purchasing power from one entity to another. (Whether the government has a moral obligation to help the truly needy is a separate issue. This is a purely arithmetic calculation.) Individuals allocate their own money more efficiently than the government.
This isn’t to say the U.S. economy is about to take off, as it did following the long and deep recessions of the 1970s and 1980s. Financial crises produce different outcomes than your garden variety Fed-tightens-to-tame-inflation recession does.
For example, following financial crises, real house prices decline for six years on average, according to economists Ken Rogoff and Carmen Reinhart, authors of “This Time Is Different.” Unemployment is slow to recover as well, compared with stock prices and GDP, which fall hard but rebound more quickly.
The politically sensitive unemployment rate, derived from a survey of households, was the biggest negative in Friday’s jobs report. The rate bounced back up to 9 percent last month from 8.8 percent in March. Still, that follows a full percentage point decline in the preceding four months and probably isn’t indicative of a new trend, the sharp spike in weekly jobless claims notwithstanding.
More significant was the addition of 268,000 private-sector jobs in April. Net revisions to prior months were positive. The average February through April private payroll gain (253,000) was the largest since 2006.
The most impressive news in the April employment report was the breadth of hiring. More than 70 percent of all non-farm industries added workers in the past three months, a share last seen in 1998.
Jobless recoveries have been the norm following the past three recessions. Employers have gotten more creative about cutting costs and maximizing productivity. They hire temporary workers to satisfy increased demand until they’re comfortable the economy has turned the corner.
The pick-up in the hiring pace is a signal to the Fed that businesses, for their part, see the recovery is “self- sustaining.”
Just one more reason to expect 2011 to differentiate itself from 2010.
(Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.)
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