Jobs and manufacturing data suggest slow recovery

In the October 1, 2009 article "Jobs and manufacturing data suggest slow recovery," Associated Press economics writer Martin Crutsinger reports that the "US economic recovery looks weak as data on jobs, incomes and manufacturing miss expectations."

WASHINGTON (AP) -- The U.S. economy is having growing pains.

Discouraging new reports on unemployment and manufacturing Thursday reinforced worries that job losses and meager factory output will make for a weak recovery as the nation climbs out of the worst recession in decades.

Stocks tumbled in response. The Dow Jones industrial average had its worst day since early summer, falling 203 points to 9,509. Just last week, it was within shouting distance of 10,000.

"The economy is not moving quickly from recession to expansion. It is moving in a very halting way," said Mark Zandi, chief economist at Moody's Economy.com. "Given the severity of the downturn, we are not going to come roaring back."

First-time jobless claims rose more than expected last week to a seasonally adjusted 551,000, the Labor Department said. Economists viewed it as a sign that employers remain reluctant to hire.

Economists think the economy lost 180,000 more jobs in September. The unemployment rate is expected to climb from 9.7 percent to 9.8 when the government releases its monthly jobs report Friday.

And factories are struggling to mount a rebound. A gauge of manufacturing activity came in at 52.6 for September, the Institute for Supply Management said -- enough to signal growth for the second straight month but still down from August.

The gloom on Wall Street to start the fourth quarter came despite encouraging signals on consumer spending and construction.

Construction spending rose 0.8 percent in August, including the biggest increase in housing activity in nearly 16 years. But spending for office buildings, hotels, shopping centers and government projects all declined.

Consumer spending rose a bigger-than-expected 1.3 percent in August, the best gain since October 2001, when the country was recovering from the Sept. 11 terrorist attacks. But about a third of that increase came from the government's Cash for Clunkers program.

Once the trade-in program ended, car sales fell back. General Motors and Chrysler said Thursday that their sales fell more than 40 percent in September. Ford reported a 5.1 percent drop.

The August spending report showed personal incomes continue to lag: They edged up 0.2 percent, helped by an increase in the minimum wage that took effect in July.

Economists fear weak income growth means that the jump in consumer spending won't last. Consumer spending is vital for a sustained recovery because it accounts for about 70 percent of all economic activity.

The jump in spending and the much smaller gain in income sent the personal savings rate down to 3 percent in August, from 4 percent in July. Analysts think Americans will keep saving more in the months ahead, trying to rebuild their nest eggs.

Many economists believe the economy is growing again after the longest recession since World War II -- perhaps at a rate of 3 percent or more in the just-ended third quarter.

But David Wyss, chief economist for Standard & Poor's in New York, said he expects growth to slip to an anemic 0.8 percent in the final three months of this year, and perform only a little better next year.

"The good news is that it will be positive, but it will not be a barnburner," he said.

Weak growth like that would not be strong enough to bring down the unemployment rate. Wyss predicts it will peak at 10.4 percent around the middle of next year. The recession has already eliminated almost 7 million jobs.

Those losses are weighing on Americans as they struggle to pare debt and build up savings accounts decimated by the stock market slide. And tighter lending has made spending difficult even for people who want to shop.

"With all that is going on, this is going to be a subdued rebound -- two steps forward and one step backward," said Sal Guatieri, an economist with BMO Capital Markets.

The rise in jobless claims last week came after three weeks of declines. The four-week average, which smooths out fluctuations, dropped to 548,000. That's well below the peak, in early April, but signals a weak labor market.

Unemployed workers are having a hard time finding new jobs. The number of people continuing to collect unemployment benefits fell by 70,000 last week to the lowest level since April, but there were 6.1 million still on the jobless rolls.

When federal emergency programs are included, almost 9 million people were getting jobless benefits in the week that ended Sept. 12. That's little changed from the previous week.

Congress has already added as much as a year of extra benefits on top of the roughly six months provided by most states. Congress is considering extending benefits even further, but the Senate plan was being slowed Thursday by some lawmakers upset that their states would be left out.

Which is more effective as a fiscal stimulus: government spending or tax cuts?

"The Economic Impact of the American Recovery and Reinvestment Act" is a January 21, 2009 report by Mark Zandi that analyzes the effect of the federal government program of tax cuts and increased spending designed to stimulate the sluggish U.S. economy. According to the 18-page report:

The fiscal stimulus plan proposed by the House Democrats includes a reasonably designed mix of government spending increases and tax cuts. The spending increases total about $550 billion in 2009-2010, and there are $275 billion in tax cuts. While the timing has yet to be determined, the tax cuts are expected to occur largely this year and much of the spending would begin in 2010.

Increased government spending provides a large economic bang for the buck and thus significantly boosts the economy. The benefits begin as soon as the money is disbursed and are less likely than tax cuts to be diluted by an increase in imports. The most effective proposals included in the House stimulus plan are extending unemployment insurance benefits, expanding the food stamp program, and increasing aid to state and local governments. Increasing infrastructure spending will also greatly boost the economy, particularly as the current downturn is expected to last for an extended period. Most of the infrastructure money will be spent on hiring workers and on materials and equipment produced domestically.

Tax cuts generally provide less of an economic boost, particularly if they are temporary; on the other hand they can be implemented quickly. A particular plus for individual tax cuts included in the House stimulus plan such as the payroll tax and earned income tax credits is that they are targeted to benefit lower- and middle-income households that are more likely to spend the extra cash quickly. Investment and job tax benefits for businesses are less economically effective, but are not very costly and more widely distribute the benefits of the stimulus plan.

Income support

The House stimulus plan includes some $100 billion over two years in income support for those households under significant financial pressure. This includes extra benefits for workers who exhaust their regular 26 weeks of unemployment insurance (UI) benefits; expanded food stamp payments; and help meeting COBRA payments for unemployed workers trying to hold onto their health insurance.

Increased income support has been part of the federal response to most recessions, and for good reason: It is the most efficient way to prime the economy's pump. Simulations of the Moody’s Economy.com macroeconomic model show that every dollar spent on UI benefits generates an estimated $1.63 in near-term GDP.x Boosting food stamp payments by $1 increases GDP by $1.73 (see Table 2). People who receive these benefits are hard pressed and will spend any financial aid they receive very quickly.

Table 2: Fiscal Stimulus Bang for the Buck
Source: Moody's Economy.com

Tax Cuts
Non-refundable Lump-Sum Tax Rebate 1.01
Refundable Lump-Sum Tax Rebate 1.22

Temporary Tax Cuts
Payroll Tax Holiday 1.28
Across the Board Tax Cut 1.03
Accelerated Depreciation 0.25

Permanent Tax Cuts
Extend Alternative Minimum Tax Patch 0.49
Make Bush Income Tax Cuts Permanent 0.31
Make Dividend and Capital Gains Tax Cuts Permanent 0.38
Cut in Corporate Tax Rate 0.30

Spending Increases
Extending Unemployment Insurance Benefits 1.63
Temporary Increase in Food Stamps 1.73
General Aid to State Governments 1.38
Increased Infrastructure Spending 1.59

Note: The bang for the buck is estimated by the one year $ change in GDP for a given $ reduction in federal tax revenue or increase in spending

Another advantage is that these programs are already operating and can quickly deliver a benefit increase to recipients. The virtue of extending UI benefits goes beyond simply providing aid for the jobless to more broadly shoring up household confidence. Nothing is more psychologically debilitating, even to those still employed, than watching unemployed friends and relatives lose their sources of support.xi Increasing food stamp benefits has the added virtue of helping people ineligible for UI such as part-time workers.

x
The model is a large-scale econometric model of the U.S. economy. A detailed description of the model is available upon request.
xi
The slump in consumer confidence after the recession in 1990-1991 may have been due in part to the first Bush administration’s initial opposition to extending UI benefits for hundreds of thousands of workers. The administration ultimately acceded and benefits were extended, but only after confidence waned and the fledgling recovery sputtered.

The Economic Impact of the American Recovery and Reinvestment Act

Mark Zandi, the chief economist at Moody's Economy.com, analyzed the effects of the federal government stimulus spending program in the January 21, 2009 article "The Economic Impact of the American Recovery and Reinvestment Act ." Here are the conclusions of his report:

Conclusions

A long history of public policy mistakes has contributed to the financial and economic crisis. Although
there will surely be more missteps, only through further aggressive and consistent government action will
the U.S. avoid the first true depression since the 1930s.

In some respects, this crisis has its genesis in the long-held policy objective of promoting
homeownership. Since the 1930s, federal housing policy has been geared toward increasing
homeownership by heavily subsidizing home purchases. Although homeownership is a worthy goal,
fostering stable and successful communities, it was carried too far, producing a bubble when millions of
people became homeowners who probably should not have. These people are now losing their homes in
foreclosure, undermining the viability of the financial system and precipitating the recession.

Perhaps even more important has been the lack of effective regulatory oversight. The deregulation that
began during the Reagan administration fostered financial innovation and increased the flow of credit to
businesses and households. But deregulatory fervor went too far during the housing boom. Mortgage
lenders established corporate structures to avoid oversight, while at the Federal Reserve, the nation's most
important financial regulator, there was a general distrust of regulation.

Despite all this, the panic that has roiled financial markets might have been avoided had policymakers
responded more aggressively to the crisis early. Officials misjudged the severity of the situation and
allowed themselves to be hung up by concerns about moral hazard and fairness. Considering the
widespread loss of wealth, it is now clear they waited much too long to act, and their response to the
financial failures in early September was inconsistent and ad hoc. Nationalizing Fannie Mae and Freddie
Mac but letting Lehman Brothers fail confused and scared global investors. The shocking initial failure of
Congress to pass the TARP legislation caused credit markets to freeze and sent stock and commodity prices
crashing.

Now, a new policy consensus has been forged out of collapse. It is widely held that policymakers must
take aggressive and consistent action to quell the panic and mitigate the economic fallout. An unfettered
Federal Reserve will pump an unprecedented amount of liquidity into the financial system to unlock money
and credit markets. The TARP fund will be deployed more broadly to shore up the still-fragile financial
system, and another much larger and comprehensive foreclosure mitigation program is needed to forestall
some of the millions of mortgage defaults that will occur otherwise. Finally, another very sizable economic
stimulus plan is vitally needed. While there will be much more discussion about the size and mix of
government spending increases and tax cuts to include, the House Democratic plan is a very good starting
point. This is important, for while such debate is necessary it must be resolved quickly. Unless a stimulus
plan is implemented beginning this spring, its effectiveness in lifting the economy will be significantly
muted.

Fiscal stimulus does carry substantial costs. The federal budget deficit, which topped $450 billion in
fiscal year 2008, could reach $2 trillion in fiscal 2009 and remain as high in 2010. Borrowing by the
Treasury will top $2 trillion this year. There will also be substantial long-term costs to extricate the
government from the financial system. Unintended consequences of all the actions taken in such a short
period will be considerable. These are problems for another day, however. The financial system is in
disarray, and the economy's struggles are intensifying. Policymakers are working hard to quell the panic
and shore up the economy; but considering the magnitude of the crisis and the continuing risks,
policymakers must be aggressive. Whether from a natural disaster, a terrorist attack, or a financial calamity,
crises end only with overwhelming government action.