Economic Recovery Watch

Doug Henwood Radio commentary, April 30, 2010: 

In the economic news, the recovery continues, with a couple of decent reports coming out of the housing market. Sales of both existing and especially new houses were up nicely in March. Much of the life, it’s hard to say just how much, came from the tax credit for first-time buyers—you do have to wonder if the market can survive the withdrawal of that stimulus. Prices aren’t recovering so quickly. The best measure of house prices we have, the S&P/Case-Shiller index, is up not quite 1% over the last year (though it’s most recent figure is for February, ancient history in these precincts). But much of the gain happened last year; prices in recent months have been pretty flat.

But the trend I’ve noted here over the last few weeks continues—people are buying again. The weekly chain store sales numbers are showing their best gain in years. Appropriately enough, the consumer confidence numbers from the Conference Board are showing an improving mood among the masses—mostly for the future, but perceptions of improvement in the job market were also impressive. It’s hard to say how much of that perceived improvement comes from personal experience and how much from hearing some more upbeat news in the media. But it does look like a recovery is underway. Or so the financial markets believe—at least until the bad news out of Europe (on which much more in a few moments) inspired more prudent sorts to put the champagne back in the chiller for now.

And, in the accurate words of Mohamed El-Erian, head man at Pimco, the world’s largest bondholder:

Markets are placing too much emphasis on the cyclical tail winds and not enough on the structural head winds. We recognize that it will take time for the market to fully understand that the global financial crisis was not a flesh wound, that the balance sheet adjustment hasn’t yet ended, and that the post-crisis phase is inherently complex. We have seen a massive stabilization of the financial market, but the hand-off from financial stabilization to a robust recovery on Main Street, which translates into the large employment creation we need [for] growth, is proving more difficult. So we worry over persistently high unemployment as well the robustness of the social safety nets.

Aside from the use of the tired “Main Street,” which would never appear on here except in a quote, this formulation can hardly be improved upon. It’s striking to see one of the royalty of finance show more concern about social safety nets than just about anyone in political life.

As I keep pointing out, the history of economies after financial crises is bleak; it typically takes years to mount any kind of sustained recovery. For now, we’re being lifted by tax breaks and deficit spending. But tax breaks expire and the deficit spending is set to be reversed within a year. (And Obama’s deficit commission is getting ready to bring out the really big and sharp knives—though there could be some political obstacles to realizing the agenda.) Our credit system is still a mess, and it would be insane to go back to the model of the 2001–2007 expansion, when debt grew nearly twice as fast as GDP, the most lopsided ratio in modern business cycle history—and despite all that credit juice, it was also the weakest of all the expansions. The tailwinds are pleasant at the moment, but without any serious structural reforms, it’s hard to see how the headwinds won’t be back.

Posted via email from Jim Nichols