The American Economy
The U.S. economy has, to date, barely avoided another economic downturn to follow the Great Recession of December 2007 – June 2009. While the American economy has generated just enough real (inflation adjusted) growth to avoid the actual recession label, a recession of confidence is clearly at play.
Businesses and consumers have largely stayed on the sidelines, watching a frustrating drama of childish behavior emerge from the nation's capital. Democrats have dug deep trenches to protect "vital" programs from exposure to slower spending growth in coming years, while Republicans decry attempts to raise taxes in any way, shape, or form.
Their combined contribution to rare successes in dealing with the nation's major economic and financial challenges has frustrated business leaders and consumers to no end, leading to widespread weakness in the economy … and some of the lowest ratings for an Administration and Congress on record. Too bad for the American people.
A pathetic 0.7% real annualized growth pace during 2011's first half should give way to a modestly stronger growth pace in the year's third and fourth quarters. Still, given the massive and historic amounts of fiscal and monetary stimulus at play, U.S. economic performance should be much more robust than it has been.
Recent near failures of the Administration and the Congress to address extending the debt ceiling clearly damaged the economy in July and August, leading to pathetic levels of job creation and the weakest consumer confidence level in 31 years. Whether the "super committee" of three senators and three house members from each party can agree to any serious longer-term deficit reduction is questionable.
The President suggested in his "jobs" speech on September 8 that he may have a stronger plan to address long-term trillion dollar annual budget deficits than has surfaced to date. We clearly hope so. No issue is of a greater threat to the American economy than the budget deficit cancer that has emerged over the past three years, with trillion dollar deficits for as far as the eye can see. As we have noted many times, the key to long-term deficit reduction is to slow the growth rate of entitlement spending in coming years.
The term spending cut has been, and remains, inaccurate. Only in the nation's capital can you commit to spend more money each year on a program … and call it a spending cut.
The past four months of dismal (if any) employment gains have trailed stronger gains in prior months. As noted before, emotional battles within the nation's capital have clearly damaged the American job creation machine.
The nation's unemployment rate has averaged 9.0% over the past three years, double the rate of five years ago. Most forecasts suggest the rate will remain at comparable levels well into 2012. One problem? The economy needs to add roughly 130,000 net new jobs monthly just to meet the needs of a rising population … just to meet the needs of a rising labor force. Even stronger job creation rates are needed to bring the unemployment rate lower.
Annualized consumer price gains of recent months have been at or near 3.6%, sharply exceeding the rise in wages. Even greater inflation pressures are found around the globe.
The Federal Reserve Chairman stills sees moderation in inflation about to unfold. Let's hope he's correct. A likely return of Libyan oil production during the next year, combined with global economic slowing, should lead oil prices modestly lower, helping to unwind inflation pressures of recent months.
The Federal Reserve
The Fed's decades-long enchantment with secrecy and keeping financial markets guessing as to future monetary policy fell by the wayside in recent months. The early August statement from the Fed's Open Market Committee that it would keep its key interest rate … the federal funds rate … at a historic low target range of 0.00%-0.25% "at least through mid-2013" was one for the record books.
Recent U.S. economic weakness suggests the Fed will provide additional monetary stimulus later this year, although it will avoid any reference to QE3. Efforts to buy much longer-dated U.S. Treasury securities in an attempt to push long-term interest rates even lower are unlikely to have much success. Mortgage rates already at 60-year lows have done little for a housing market dominated by weak prices, massive new government-mandated paperwork, and an economy lacking that key ingredient … confidence.
The European Dilemma
Financial threats to the European Union and the commonality of a single currency are more serious now than at any other time. Global financial markets have demanded austerity from the Greeks, the Irish, and the Portuguese. Similar demands upon Italy and Spain seem on the horizon.
The Germans, the French, and the International Monetary Fund (IMF) have already had their fill of dumping hundreds of billions of euros into the smaller nations. Similar requirements to stabilize much larger Italy and Spain will have major political implications among the French and the German people.
Political leaders in France and Germany have made it clear they support the euro monetary system. They also are compelled to support their largest banks, which have tens of billions of euros of troubled-nation bonds in their portfolios. It remains a reasonable assumption that the euro zone in 5-10 years may look somewhat different than that of 2011.
China and India have enacted policies to slow their impressive growth rates in an effort to keep inflation under wraps. Japan struggles with the aftermath of natural disasters and a lack of meaningful economic growth over the past two decades.
Other major global players are impacted by investor anxiety and financial market gyrations not for the faint of heart. Keeping food and energy costs at affordable levels have been major challenges during 2011.
Jeff Thredgold is the chief economist for Zions Bank and founder of Thredgold Economic Associates, a professional speaking and economic consulting firm. Visit www.thredgold.com.