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Posts from the ‘Recovery’ Category

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Money Talks Illustration by Oliver Munday, The New Yorker

GDP grew more than expected last quarter, jobless claims remain low, and one survey-based index says manufacturing activity hit a three-year high in July. Here are a few other stories from the week’s economic news:

  • The verdict on the July jobs report is that it was a “mild disappointment.” Non-farm payroll employment rose by 209,000 last month, below gains of 298,000 in June and 229,000 in May. Since the start of the year, the labor force has grown by an average of 126,000 people per month. Over the same period, job gains have averaged 230,000 per month. If sustained, that difference is enough to keep the unemployment rate falling by more than 0.1 point per month. The unemployment rate did nudge up a bit in July, to 6.2 percent from 6.1 percent, but that follows an outsized 0.6-point drop between March to June. While unemployment is down from a peak of 10.0 percent during the recession, Justin Wolfers, writing for the Upshot, says it is still way too high. Wolfers observes that if you were to line up all the unemployed people in the country, they would stretch from New York to San Francisco. That is a striking visual, but what does it mean for the economy? Following the recession, unemployment peaked at 15 million people. That number is down to 9.7 million now, but it is still higher than the low of 6.8 million prior to the recession. AIER’s Business-Cycle Conditions analysis suggests the economy will strengthen in the second half of the year, which should keep the employment picture improving.

Read more

U.S. Manufacturing Activity Slows in January

amazon warehouseThe Institute for Supply Management (ISM) Report on Manufacturing Purchasing Manager Index declined sharply from 56.5 in December to 51.3 in January. While the index is still expanding, it registered the lowest level since May 2013. The survey of purchasing managers gives an overview on the factory floor.

New orders and production slowed significantly but are still expanding. In a reversal, back-logged orders began contracting as firms found time to play catch up. Inventories declined for second straight month. Despite the run up in Q3 inventories, real-time management has caused a long-term decline in inventory levels. It may seem unbelievable, but Amazon is exploring shipping goods before they are ordered.

Managers blamed cold weather for slower input deliveries in January. Although no commodities were reported in short supply, input prices trended higher. Employment in manufacturing increased, but at a slower rate, offering little help to stubbornly high unemployment.

The ISM  is not hard data, but rather the views of managers in the trenches. The index does not account for firm size or magnitude of variable increase/decrease. AIER continues to monitor an array of indicators in the monthly Business Cycle Conditions Reports to gain a comprehensive view of the economy.

[Photo: Flickr]

Larry Summers’s Turkey Hangover

Thanksgiving Turkey Dinner HangoverA colleague lamented at the lunch table yesterday that he hates Thanksgiving because he tends to overeat. Who doesn’t? The overindulgence of Thanksgiving dinner is followed by the turkey hangover—listlessness, bloating and a sizable portion of guilt.

In addition to our turkey and pumpkin pie this Thanksgiving, we have this morsel from Larry Summers—President Obama’s first choice for the Federal Reserve chair—to digest: in a speech at the International Monetary Fund last week, he suggested, “Suppose that the short-term real interest rate that was consistent with full employment had fallen to -2 percent or -3 percent sometime in the middle of the last decade.” This somewhat opaque notion has won a lot of attention from economists and pundits, much of it positive. But what does it mean?

Let’s indulge in a little Thanksgiving metaphor: in the years leading up to the 2008 crisis, every day was Thanksgiving. Americans were eating a lot of turkey—in fact, more turkey than was good for us. Why did we do this? Because turkey was relatively cheap, because we were told that turkey was good for us, and because with the price of turkey so low, turkey producers and vendors had to sell more and more of the stuff to make a profit.

In other words, leading up to the 2008 crisis, Americans consumed a lot of credit. Why? Because credit was relatively cheap (interest rates were low), because we were told that credit was good for us (owning a home is the American dream! Get a mortgage!), and because with the price of credit (interest rates) so low, lenders had to push more and more of it to make a profit. We all know that recovering from an extended bout of overeating requires a diet of discipline and moderation—and much, much less turkey. Diets are never fun, they are never easy, and it usually takes longer to work off the pounds than it did to put them on in the first place.

In his IMF speech, Larry Summers essentially argued that the recovery of the U.S. economy from the Great Recession is sluggish not because the nation collectively overate in the years leading up to the crisis, and the diet necessary to correct that overeating will be long and difficult, but rather that turkey prices (interest rates) are still too high. What Summers thinks we need is even cheaper turkey, incentivizing us to give up our diets and go back to overeating.

This might make sense if you tend to see the world from the perspective of people who benefit from selling a lot of turkey, but is it the right answer for the longer-term health of the economy?

photo courtesy Mom Prepares/Flickr

The Regulation Argument: Auto Loans Up, Credit Cards Down

Two recent articles from Quartz look at how lending and credit have changed since the 2007 recession and show how government regulation can impact (or not impact) American consumer economics.

The first article, which looks at sub-prime auto lending trends in the last few years, found that independent lenders are giving more car loans to U.S. customers with bad credit. Nearly 27 percent of all auto loans in the past five years were to consumers with credit scores of 500 or less. A loophole in the Dodd-Frank financial reform act of 2010 is seen as a cause of this trend.

From Quartz:

“That law had created the Consumer Financial Protection Bureau (CFPB) to act as a watchdog for retail lending, but had explicitly carved out auto dealerships from supervision. This made consumer advocates nervous but had investors seeing an opportunity to charge high costs for loans at a time of low yields.”

While regulation (or lack there of) has made it easier (if not safer) to get a car loan in 2013, it has had the opposite impact on credit cards. The second story looks at the way credit card debt has decreased in America since implementation of the US Credit Card Accountability, Responsibility and Disclosure Act (CARD) in 2010.

From Quartz:

“The CARD ACT … blocked credit card companies from extending credit without assessing the customer’s ability to pay … implemented rules on marketing to people under the age of 21 to crack down on abuse at college campuses … limited a credit card company’s ability to levy penalty fees … and restricted the circumstances in which the company could jack up interest rates.”

The results of CARD, according to the story, include a 2 million decrease in the the number credit cards issued to Americans under the age of 21 since 2007, and that credit card companies have “just stopped giving cards to people on the bubble.”

You can read both stories on Quartz by clicking the links below.

More Bad Borrowers are Getting Car Loans

The U.S. Has Kicked its Credit Card Addiction

What Do the Second Quarter GDP Numbers Mean?

The U.S. Department of Commerce released its third and final estimate for the country’s second quarter Gross Domestic Product (GDP) Thursday morning, setting it at an unrevised 2.5 percent growth rate.

Here’s a quick look at what some media outlets are saying about the GDP numbers:

  • The Washington Post is citing the 2.5 percent rate as a factor in rising stock futures, saying the number “reaffirms … economic growth during the second quarter.”
  • called the 2.5 percent rate a “sign of an economy slowly improving, though at a slower pace than it has historically,” and quoted Fed Chairman Ben Bernanke’s comments at a press conference last week: “Economic growth has generally been proceeding at a moderate pace, with continued—albeit somewhat uneven—improvement in labor market conditions. The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and the labor market.”
  • Business Insider said the 2.5 percent estimate “missed expectations,” citing an “expected uptick to 2.6 percent in the final reading,” and added that “Personal consumption growth was also unchanged from the BEA’s previous reading at 1.8%, and was also expected to tick up to 1.9% in the final reading. The number marks a slowdown from Q1’s 2.3% pace of growth.”
  • took a positive outlook on the 2.5 percent (while still mentioning that the number came in lower than its 2.6 percent estimate), saying “the economy expanded at a faster pace in the previous three months,” and citing a decline in the number of unemployment claims the government has received in the short term as a positive sign of recovery.
  • Businessweek called the number discouraging. “Consumers spent more cautiously in July as their income barely increased. The government spending cuts have weighed on defense spending and business investment. And higher mortgage rates now threaten to slow a housing recovery that had a solid contributor to growth in the first half of the year.”

The Commerce Department’s full Q2 GDP release is here. 

Questions for Mike Konczal

Mike Konczal is a fellow with the Roosevelt Institute who blogs at the Next New Deal and writes a weekly column at The Washington Post’s Wonkblog. His work has appeared in publications including Salon, The Atlantic, and The American Prospect. A former financial engineer and mathematical analyst, he writes about unemployment, financial reform, and inequality.

In one sentence, describe what you do at your job every day.

I work at a non-profit think tank called the Roosevelt Institute, and I try to keep track of the latest in the efforts to reform the financial sector in light of the recent crash, as well as understanding the arguments and data behind why the economy remains so sluggish, and unemployment so high, in the Great Recession.

What’s the most important economic concept for the average person to understand?

Well, right now, I think the idea that while any one market might be self-regulating, all the markets together in the macro-economy can end up far away from their potential if the Federal Reserve and government spending isn’t prepared to meet aggregate demand.

Name three people, living or dead, who you’d invite to your dream economics-themed dinner party.

William Beveridge, Oskar Lange and Henry George. I’d have pizza and beer and a ton of history and economics books, and ask them to make sense of how their specific political-economic projects had evolved since they died.

What’s one policy change you would make to help aid the recovery?

Have the Federal Reserve move to a higher inflation target, say 4 percent. We’ll need to eventually. Beyond that, extending the payroll tax cut, building up some infrastructure while everything is cheap and sitting idle, and modifying bankruptcy would help.

Tell us one thing about the economy that the media often gets wrong.

The deficit in the Great Recession wasn’t the result of an out-of-control Congress. It was largely the result of automatic stabilizers which led to spending increases, while unemployment and idle resources caused low revenues.

What book do you think everyone should read?

I think Barbara Fried’s The Progressive Assault on Laissez Faire is a masterpiece of economic theory, legal thought and intellectual history, and also just a fun and interesting read. More progressives nowadays should read it.

What do you refuse to spend money on?


Check out past interviews with Robin Grier, Michael Munger, Emily Oster, and other economic thinkers here.

AIER’s Steven Cunningham in The Washington Post

Americans brought home fatter paychecks in May, and they celebrated by spending and saving more. AIER’s Director of Research Steven Cunningham talks with The Washington Post about what these gains can tell us about growth in 2013:

Americans benefited from higher wages and salaries, which increased by $19.7 billion, or 33 percent, compared with April. Wage increases have been weak, even as personal income has improved. Hence, May’s rise in wages indicates that the recovery is broadening to include the slow but steady job market (the economy added 170,000 jobs last month).

“It’s a good sign, in line with our projection for stronger growth on the second half of the year,” said Steve Cunningham, director of research at the American Institute for Economic Research.

Read the whole article, written by Katerina Sokou, here.

Guest Post: The Economy’s “New Normal”

How long can we expect the economic recovery to last? Earlier this week, Bloomberg suggested that the expansion could continue for years. But AIER’s Polina Vlasenko says this prediction is founded on a shaky assumption. 

The basic argument that the recovery will last for years, as presented in the Bloomberg article, is as follows:

1) So far, the economy has not recovered much. The labor market is still slack, interest rates are low, inflation is not picking up, and people and companies have not borrowed to the max yet. In general, as the article puts it, “the economy isn’t seeing many of the excesses that often presage the start of contractions.”

2) Therefore, the economy still has a ways to go before reaching its “normal state.”

3) Hence, the recovery (i.e. the return to the normal state) will take several more years.

This reasoning is logically sound, except for one thing–it makes an implicit assumption that the economy will definitely return to its normal (pre-2007) state.  I am not sure the authors of the article–or the economists they quote–have a clear vision of what that “normal state” is like. But some aspects of that normal state are mentioned in the article. They are: low unemployment (probably around 5 percent ), higher household formation (similar to pre-2007 levels), and people replacing durable goods, especially cars, more frequently than they do now—presumably, as frequently as they did before 2007.

But there is no guarantee that the economy will ever return to the unemployment rate or the car-replacement rate that existed in the years before the recession. People often assume that whatever existed before a significant economic crisis is the norm to which the economy should return. But what if the years before the crisis were not the norm? Read more

Our Uneven Recovery

The recession hit a lot of Americans hard. But it didn’t affect all people equally. A new study from the Federal Reserve Bank of St. Louis reports that the worst-hit groups were families under 40, those without college degrees, and African-American or Hispanic households.

These groups are economically vulnerable in general. Two financial factors compounded their losses during the crisis. First, younger and less-educated families had large shares of their wealth tied up in housing. This put them on unsteady ground as the market tanked. Second, younger households and African-American or Hispanic families tended to have high debt-to-asset ratios. “Thus,” authors Ray Boshara and William Emmons write, “the very families most exposed to the economic fallout of a deep recession—fallout that came in the form of job loss or reduced income—possessed the weakest and riskiest balance-sheets.”

Not only was the recession particularly painful for these groups, the recovery has been more difficult. On average, younger, less educated, and African or Hispanic families are much worse off financially than they were before the crisis, according to a May Fed report by William Emmons and Bryan Noeth. Young, white or Asian families without high school diplomas have regained just 21 percent of the wealth they had before the economy crashed. Young, college-educated African-American families have recouped only 31 percent. By contrast, families headed by someone who is college-educated, white or Asian, and between the ages of 40 and 61 have recovered about 98 percent of their former net worth.

The Boshara-Emmons study also paints a bleak picture of wealth recovery for the majority of Americans. Earlier this year, the Fed estimated that households had regained about 91 percent of the wealth lost during the recession. But Boshara and Emmons say that number is misleading. Adjusting for inflation and population growth, the average household has recovered only 45 percent of its pre-crisis wealth. They also point out that two-thirds of the rebound in household wealth since 2009 comes from the stock market. That disproportionately benefits the wealthiest 10 percent of Americans, who own 80 percent of all stocks.

For further reading: If the Economy’s So Strong, Why Don’t We Feel Better?

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