just around the corner

Forecasters keep thinking there’s a recovery just around the corner. They’re always wrong. by Neil Irwin

(via Thoma)

Consider, for example, the Fed’s projections in November of 2009. Sure, growth would be slow in 2010, they held. But 2011 growth, they expected, would be 3.4 to 4.5 percent, and 2012 would 3.5 to 4.8 percent growth. The actual levels of growth were 2 percent in 2011 and 1.5 percent in 2012. 

What’s amazing is that the Fed’s newest projections, released in December of 2012, look like they could have been copy and pasted from 2009, just with the years changed: They forecast sluggish growth in 2013, 2.3 to 3 percent, followed by a pickup to 3 to 3.5 percent in 2014 and 3 to 3.7 percent in 2015. 

This isn’t meant to pick on the Fed; the same is true of other forecasters both in the government and the private sector. The Economic Policy Institute captured the CBO’s proclivity for projecting growth just around the corner in the chart below, from a briefing paper released last week. Essentially, this shows how as the years have passed, the CBO just keeps pushing back the timing of a genuine recovery—the time when the U.S. economy’s output has returned to the agency’s estimate of its potential—further and further. In early 2009, the CBO thought we would be back to full employment right about now; in their outlook released earlier this month, that was more like 2016 or 2017. 

Source: Economic Policy Institute 

The overly optimistic forecasts have rested on one crucial assumption: That if we can just get through this rough patch, the natural forces of economic regeneration will assert themselves, and growth will snap back into place....

However, Goldman Sachs's Hatzius is predicting recovery in 2013H2 and 2014. He called the housing bubble and has a model based on sectoral balances: private sector and government leveraging and deleveraging.

Bernanke gave a talk to the National Association for Business Economists.

In addition to the heavy toll on workers and families, he noted that “Because of its negative effects on workers’ skills and attachment to the labor force, long-term unemployment may ultimately reduce the productive capacity of our economy.”
...

Mr. Bernanke said Monday that structural unemployment may have increased in recent years, but that high unemployment was mostly cyclical.

“The continued weakness in aggregate demand is likely the predominant factor,” he said. “Consequently, the Federal Reserve’s accommodative monetary policies, by providing support for demand and for the recovery, should help, over time, to reduce long-term unemployment as well.”

Mr. Bernanke outlined several reasons for this conclusion. He said that people who lost work recently had not increased their advantage in finding new jobs over the long-term unemployed, as might be expected if the latter group were languishing because they lacked relevant skills. And he noted that hiring generally remained weak across the economy, again suggesting that the lack of new hiring had broad causes rather than industry-specific roots.

New Jobs Report: Can We Say “Recovery” Yet? by Jonathan Cohn

Recovery Winter?

Why Job Growth Is Likely to Slow by David Leonhardt

Why do economists expect growth to slow? The warm winter has probably pulled some spending forward into the last few months and will reduce spending in coming months, says Joshua Shapiro, an economist at MFR Inc. in New York. Rising oil prices also play a role. So does the continuing debt overhang, which makes a sustained recovery difficult.

None of these forecasts should be taken as gospel, of course. Maybe the gross domestic product numbers are wrong and will be revised upward in coming months, as government economists receive more data about the economy’s condition. Maybe the recent job gains will lead to a surge in confidence that lifts spending above expected levels.

But the most likely path includes a slowdown in job growth. It’s easy to forget that on a day with a jobs report as positive as this one.

My colleagues Binyamin Appelbaum and Annie Lowrey have each written recent articles with more details on the predicted slowdown.

And:

On Friday, Macroeconomic Advisers, one of the most closely watched forecasting firms, reduced its estimate of economic growth in the current quarter to an annual rate of 1.8 percent, from 2 percent. And 1.8 percent growth does not generally lead to very strong job growth. In the fourth quarter of last year, by comparison, the economy grew 3 percent.
...

Sure enough, most forecasters do expect job growth to slow. Barclays Capital expects 200,000 jobs a month for the rest of the year. IHS Global Insight forecasts a slowdown to 180,000 jobs a month. Macroeconomic Advisers says it will slow to 140,000 jobs a month in the final three quarters of this year.

“We don’t get anything like the booming labor market with 300,000 jobs,” said Laurence H. Meyer, senior managing director of Macroeconomic Advisers and former Federal Reserve governor. “It would take much stronger growth than we have to do that.”

As a benchmark, the economy needs to create roughly 125,000 jobs a month to keep up with population growth.

Calculated Risk is more upbeat:

There are reasons to expect better job growth overall this year compared to 2011. Last year was negatively impacted by the tsunami, bad weather, high oil prices and the debt ceiling debate. We can't predict the weather, and oil prices are high again - but hopefully there will be no natural disasters this year, and also no threats of defaulting on the debt.

Plus residential investment (new home sales and housing starts) has made the bottom turn, and even with a sluggish housing recovery, residential investment will add to economic growth in 2012. Also, the employment losses from state and local governments will probably end mid-year. As the BLS noted:  

Government employment was essentially unchanged in January and February. In 2011, government lost an average of 22,000 jobs per month. 

Employment growth in manufacturing will probably slow in 2012, but the overall picture is improving. Unfortunately the labor market is still very weak with 12.8 million Americans unemployed and 5.4 million unemployed for more than 6 months.

Another positive report was the ISM services survey that indicated faster expansion in February. Negatives included a larger trade deficit, an increase in initial weekly unemployment claims, and - of course - falling house prices in January.

The February job market: not bad by recent standards by Doug Henwood
 

DeLong has spoken highly of Macroeconomic Advisors, but Calculated Risk's outlook is persuasive. Although those betting on the downside have usually been right these past few years.

What about the jobs report this coming Friday?

DeLong reports:

Morgan Stanley Still Expects QE3 This Year: Morgan Stanley continues to think the Federal Reserve will provide more stimulus via bond buying this year, even as improving economic data have led many in the market to think the sun may be setting on that particular strategy. “For some time, our call has been that the Federal Reserve will undertake additional balance-sheet action in the first half of 2012,” writes Vincent Reinhart, an economist with the bank and a former top-level Fed staffer. He argues it’s most likely the Fed will act to expand its balance sheet via Treasury and mortgage bond buying — in market parlance, QE3 — at either the April or June Federal Open Market Committee, and that the ultimate size of the program could tack on $500 billion to $700 billion onto what is currently a $2.9 trillion balance sheet…. Officials won’t wish to be seen starting a high-profile action in the thick of the presidential campaign. Also, he reckons growth will still be too weak, and inflation will be falling short of the Fed’s 2% target.

The recent improvement in economic news, especially on the jobs front, will increasingly be seen as a head fake, the Morgan Stanley economist said. “We share the view that the fillip to economic growth associated with a restocking of inventories is fading and that real GDP growth will slow notably in the current quarter,” Reinhart said. “Anxiety-inducing headlines that the economy is losing steam will be conducive to Fed action.”

China is weakening with a real estate market that has turned. DeLong reported slow growth in first quarter (where did he get that?)

Ryan Avent believes Fed will stand pat.

Dean Baker pointed to an ignored, disappointing durable goods order report.

It's Halftime in America ... and We're Winning by Yglesias

review of Scheiber's The Escape Artists by Yglesias

Why We Need A Volcker Rule by Mike Konczal

Mike Konczal at Rortybomb on February auto sales:

As auto sales per capita go up, unemployment goes down.  And we just saw a major jump in auto sales.  Eric Platt at Business Insider: ”As predicted by Business Insider, statistics firm Autodata Corp. is calling the February seasonally adjusted annual rate of sales at 15.1 million units for the U.S. auto industry.  Earlier in the afternoon, Business Insider forecast the rate for February would come in at 15.1 million, a substantial jump from January’s 14.1 million pace.”

And plugging an extra million into the equation means that unemployment should drop around 0.3% – to a rate of 8%.  We need to be talking 300,000+ jobs to get to that rate.

All kinds of caveats – no idea if the auto sales relationship holds up, lots of unemployed are on the sidelines, which means the unemployment rate may go up even with job gains as people re-enter the work force, etc.  But still promises to be a monster next Friday.  We’ll be covering it on twitter starting at 8:30am sharp.

False Starts by Kash Mansori

But over the past couple of months we have now been experiencing a third round of positive signs on the recovery in the US. Is this spring likely to reveal yet another false start for the US economy?

I don't think so. I think this time the improvements are for real, and more sustainable. There are two primary reasons that I say this (putting aside the obvious one, which is "third time's the charm"). First, the housing market finally appears to be well and truly near its cyclical bottom. Yes, house price indexes are still showing some declines, but there is good reason to think that there's very little further for house prices to fall. House price-to-rent ratios and real housing prices are just about where they were in the late 1990s, before the housing bubble was even a glimmer in any home-owner's eye. It's not likely that prices will fall much further. And construction activity has already bottomed out, with changes in real estate construction now adding to economic growth rather than subtracting from it.

The second reason is that the process of debt deleveraging by American households is further along than it was during the false economic starts of 2010 and 2011.

(via Thoma)

Secret Commerce Department Report Shows the Economy May be Faltering by Dean Baker

In short, this is an unambiguously bad report. My view is that it is probably an anomaly. We will perhaps see upward revisions in the second report for January or a big bounceback in the February numbers. But, this report definitely deserved some attention. It might seem rude to spoil the celebrations over our 3.0 percent growth rate last quarter, but that is what reporters are supposed to do.

E.U. Leaders Challenged by Rise in Joblessness

The jobless rate in the 17 euro zone countries rose in January to 10.7 percent, from 10.6 percent in December. It reached the highest level since 1999, when the euro was introduced, according to Eurostat, the European Union’s statistics agency. Flagging economies like Italy and Greece were responsible for much of the increase. For all 27 E.U. countries, the rate ticked up to 10.1 percent in January from 10.0 percent in December.  

European countries nonetheless diverged widely: Spain again topped the list with a 23.3 percent jobless rate, followed by Greece, at 19.9 percent in November. That compared with 4 percent unemployment in Austria and 5 percent in the Netherlands.

Federal Reserve Chairman Sees Modest Growth by Binyamin Appelbaum

But the Fed has remained cautious, and Mr. Bernanke repeated a familiar list of reasons for that stance, including the depressed housing market and turbulence in Europe. The Fed also has overestimated the pace of recovery several times in recent years.

“The recovery of the U.S. economy continues, but the pace of expansion has been uneven and modest by historical standards,” Mr. Bernanke said. He noted that the Fed did not expect “further substantial declines” in the unemployment rate this year.

As a result, he said the Fed remained committed to continuing its economic stimulus efforts, keeping short-term interest rates near zero and maintaining a large portfolio of Treasuries and mortgage bonds to further reduce long-term rates, holding down borrowing costs for businesses and consumers.

Mr. Bernanke gave no indication that the Fed was considering new efforts, like increasing its holdings of mortgage-backed securities to bolster the housing market. Indeed, his remarks suggested that the Fed’s attention was shifting to the possibility that the recovery is outpacing its expectations.