Is the U.S. Economy Slowing Again?
The most recent data suggest that the U.S. economy may be slowing again. It remains to be seen whether this is a temporary phenomenon, a predictable consequence of the tax increases and spending cuts imposed earlier in the year, or something else.
The March employment report was the first indicator. As I wrote at the time, the news on jobs wasn't quite as bad as the headlines suggested, but it wasn't good, either. Surveys of business activity from the National Association of Purchasing Managers also contained some unwelcome news. The index of U.S. manufacturing activity fell to 51.3 in March from 54.2 in February. The index is still above 50, which means that manufacturing activity is still growing, but it implies a slowdown. Similarly, the index for services fell to 54.4 in March from 56.0 in February. Both indices are back to where they were last summer.
This morning we got to see the latest data on retail spending and consumer confidence. Both fell significantly more than expected. Retail spending is now growing at its slowest pace since the end of the recession. While this is hardly an indicator of imminent recession, the extent of the slowdown since the summer of 2011 is worrying.
Consumer confidence, as measured by the University of Michigan, declined sharply and unexpectedly, to 72.3 from 78.6 last month. Again, that doesn't mean that recession is around the corner. In fact, the absolute level of confidence is similar to what it was throughout 2009 and 2010. Like employment and retail spending, the data suggest an economy that is continuing to grow at a slow and steady pace, rather than an economy that is about to finally take off.
The markets seem to have noticed. The price of copper, long considered to be the best proxy for global economic activity, has declined more than 8 percent since the middle of February. Similarly, the price of Brent crude oil has fallen almost 14 percent over the same period. Yields on 10-year government bonds have fallen to 1.7 percent from just over 2 percent since the beginning of March. Equity investors, on the other hand, seem to have shrugged off the disappointing data, perhaps in part because the profitability of large U.S. corporations is not linked as tightly to the health of the U.S. economy as in the past.
This is generally disappointing. Sluggish growth will not close the employment gap anytime soon. Millions of people who would otherwise be working will continue to drop out of the labor force, which will create even more long term costs for society. Policymakers, however, seem determined to keep doing what they have been doing, in the hopes that it will start producing significantly different results.
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