Fed Pianalto says nothing

Tuesday, May 18, 2010

Fed's Pianalto: "Subdued" Recovery, Unemployment Rate to decline "Gradually"

by CalculatedRisk on 5/18/2010 12:45:00 PM

From Cleveland Fed President Sandra Pianalto: Forecasting in Uncertain Times

As we are all aware, we're emerging from the deepest and longest recession since the Great Depression. Our models would tell us that the deeper the downturn in the economy, the more rapid the recovery. You've probably heard this referred to as a V-shaped recovery.
However, my outlook is that our journey out of this deep recession will be a slow one because we face two primary headwinds that I expect will temper growth for awhile. The first is the effect of prolonged unemployment, and the second is a heightened sense of caution on the part of consumers and businesspeople.
...
About half of those who are currently unemployed have been out of work for at least six months, and the longer someone is out of work, the harder it is to find a job. In the 1982 recession, which was another severe recession, the average duration of unemployment peaked at 21 weeks, but today the average is already over 30 weeks—a record high. Research also tells us that workers lose valuable skills during long spells of unemployment, and that some jobs simply don't return.
...
The second powerful headwind in this recession is a heightened sense of caution, driven by a deep uncertainty about where the "new normal" or baseline might be. A whole generation of Americans who began their working careers in the mid-1980s had experienced only long periods of prosperity punctuated by just two very brief downturns. Those experiences encouraged an expectation for relatively smooth growth. Now everyone's expectations have shifted as a result of this long and deep recession.
People's attitudes about their own prospects have fundamentally changed. In a recent survey by Ohio's Xavier University, 60 percent of those polled believe attaining the American dream is harder for this generation than ones before. And nearly 70 percent think it will be even more difficult for their children. Many people are now just aiming for “financial security” as their American dream
...
Businesses are also cautious. Business leaders base many decisions on forecasts, and they tell me that they are attaching the same high degree of uncertainty around their projections as I am. Most business leaders say that they’re not planning significant hiring until there’s more clarity about how the recovery is going to progress and about policies relating to health care, energy, the environment, and taxes. This caution translates into fewer job opportunities, fewer equipment purchases, fewer building projects—and on and on.
These two factors—overall caution and the effects of labor market damage—lead me to an outlook for relatively subdued output growth through this year and next, with unemployment rates that decline only gradually.

We already know that a "V-shaped" recovery is off the table. Researchers at the San Francisco Fed argued yesterday for a recovery between a "U" and a "V", see The Shape of Things to Come, however those researchers focused on GDP, and I'd suggest GDI, employment and real personal income less transfer payments all suggest an even more sluggish recovery than GDP.
Also I'd add residential investment to Pianalto's two "headwinds". Usually housing is a key engine of growth in a recovery - for both GDP and employment - and this time any contribution from housing will be muted for some time.

Robert Kuttner schools Obama team on economics, politics

 

Hire deficits:  Until people start working, the economy won’t
Robert Kuttner
Boston Globe
May 11, 2010

THE GOOD NEWS is that the private sector created 231,000 jobs in April. The bad news is that unemployment rose from 9.7 to 9.9 percent because more people are seeking work — over 800,000 entered the labor force in April, dwarfing the increase in jobs. The true unemployment rate is over 17 percent if you count part-time workers who want full-time jobs plus those who have given up because the job search has become pointless, with more than five applicants for every job opening.

The economy needs a half million new jobs every month for the next four years, just to return to the prerecession unemployment rate of 2006. And that economy was nothing to brag about, with average wage growth lagging behind inflation since 2001.

Perversely, austerity has become the cure du jour. Top administration officials say there will be no new jobs initiative, because deficit reduction is needed to reassure the bond market. President Obama’s new fiscal commission is expected to recommend cutting services and raising taxes.

You have to wonder if the Obama economic team is talking to the political team. If the Democrats suffer a blowout in the November midterm elections and Obama risks being a one-term president, the biggest reason will be persistently high unemployment.

The issue of jobs has simply dropped off the radar screen. Obama tackled health care, and now he is focused on banking reform, immigration, and nuclear proliferation, which are all necessary causes — but he will live or die politically based on whether he can get more jobs and more good jobs created, with some measurable gains by November.

We seem to have settled into a pattern reminiscent of the late 1930s. Economic growth has turned positive — it was a respectable 3.2 percent in the first three months of 2010 — but today’s growth generates too few jobs. Why is that?

The aftermath of the financial blowout has left employers hesitant about hiring permanent workers. Consumers are buying again, but with high unemployment, flat wages, depressed pensions, and depleted home equity, they aren’t buying enough. Managers are working existing employees harder rather than hiring new ones.

For two decades, employers increasingly used outsourcing and off-shoring to cut their labor costs. That trend accelerated after the financial collapse. Many economists wonder whether permanent payroll jobs will ever return to their former level if present trends continue.

Overseas, Greece has agreed to a stringent budget-cutting program as the price of getting emergency aid from the European Union and the International Monetary Fund. Many British commentators have described their next government as a “poisoned chalice,’’ because the new prime minister will pursue hugely unpopular belt-tightening. At home, states are cutting jobs and services.

But the austerity cure slows growth, raises joblessness, and makes debt-reduction more painful. It’s better to restore high rates of growth and employment. Then, after recovery comes, we can balance the budget at a higher level of economic output.

In the late 1930s, Franklin Delano Roosevelt tackled joblessness with his public works programs. These were palliative, but the permanent cure was a massive economic recovery — as byproduct of World War II. When the war came, we damned the torpedoes and the deficit worries, and spent whatever it took to defeat the Nazis and the imperial Japanese.

Debt increased massively, but economic growth shot up to 12 percent a year for the four war years, and unemployment disappeared. The war also brought huge investments in manufacturing technology. That twin stimulus powered a 25-year postwar boom, and the war debt was easily paid down.

The war was also a big boost for labor, and not just because of the plentiful jobs. Roosevelt’s War Labor Board insisted that any company bidding for a defense contract treat its workers decently and not bust unions.

Obama’s challenge today is to define the economic equivalent of World War II — without the war — and inspire citizens to support it. Lately, the news has been dominated by the Boston water main break, the oil spill in the Gulf of Mexico, and layoffs of teachers. There is no shortage of candidates for public investment in infrastructure, renewable energy, advanced industry, and decent public services.

Instead of joining the austerity parade, Obama should be committing his administration to higher growth, public renewal, and good jobs.

No Recession in the Global Economy, but Divergence Aplenty

No Recession in the Global Economy, but Divergence Aplenty

18
May

Yours truly is actually a macroeconomist, indeed with a knack for financial markets, but still; a macroeconomist nonetheless. However, you would not have gotten that impression from the writings here end last week where I worried a lot about the worry of financial markets. I still do, worry that is, mostly because we are in a very delicate situation where a severe shock in financial markets can easily and quickly be transmitted into the real economy. Moreover and as Edward eloquently conveys in his recent post the structural challenges we face are complex and difficult.

Yet, in terms of the immediate evolution in the real economy, and in case you had not noticed, the recovery is coming along just fine.

(click on pictures for better viewing)

If ever there was a clearer sign of a v-shaped recovery I’d like to see it. On an annual basis the EMU industrial production index rose 11.6% in Q1 2010 and on the quarter the increase was 4%. Despite the emerging crisis in the Eurozone and with reservations for the final number of Q2-10, this suggests that the turnaround is intact so far. Naturally, the level of industrial production is still very low compared to before the crisis and, as I have argued, this is an important gauge in terms of the overall strength of the momentum. But, the recovery remains real at this point

Of course, it is not difficult to pick the positive discourse apart and this applies especially to the Eurozone there is a bound to be notable divergence between the growth rate of economies. In particular, it does not take much Rubinesque imagination to see what awaits the famed Eurozone periphery (Spain, Portugal and Greece) who are now about to embark on a very brutal spell of internal devaluation; kind of like in the Baltics who are undergoing the same [1].

This comparison may of course be inappropriate for a number of reasons, but it provides a good yardstick with which to look ahead into especially 2011 where the first part of austerity measures will really start to bite. Whether the Eurozone "core" remains enough momentum to pull the Eurozone forward is really not the important issue here. The real problem here is that from here on imbalances (not just external) will compound. In the lingo of development economics the convergence which was thought inevitable and on track is now about to unravel. In this respect, the comparison with key parts of Eastern Europe is well chosen I think.

And not just Europe…

Yet, if the outlook for Europe is still very uncertain the global outlook is positive for the remainder of 2010 even if the momentum appears to be flattening out;

On an annual basis leading indicators for the major emerging economies as well as the OECD are coming in very strongly for Q1-10 and also over the quarter (i.e. from Q4-10) do we observe growth with the notable exception of China where activity seems to levelling off a tad going into 2010 on the back of continuing measures by the government to restrain the economy.

It is difficult to deny that the leading indicators tracked by the OECD seems to be flattening moving into Q2-10 and it will naturally be interesting to see whether momentum will be sustained. As ever, divergence both in levels and actual growth rates will be paramount to factor in, but I am very confident that we are not going to see a double dip recession in for example the US let alone the emerging market edifice in 2010. In Europe, the tug-of-war will between growth in France and Germany (with the latter exporting to EMs as the only real source of growth) and a continuing slump in Southern Europe. However, since 2010 budgets are already passed to indicate very stimulative policies throughout Europe the growth momentum will be strong in 2010 although the medium to long term look decidedly awful.

Event Risk still High

As a natural finishing point it should not escape market participants and analysts alike that event risk is currently at a very high level. In many ways, we already have an event in so far as goes the crisis in Europe but I can think of plenty of more sources of potential market destabilisers. The point here is then that at the current juncture the transmission between market distress and the real economy is likely to be strong and relatively quick. In this sense, the recent news that the interbank market is freezing over once again is indicative that not all is well and I am watching this very closely.

As such I maintain my somewhat bearish inclination and deep skepticism for where aggregate demand is actually going to come from in the medium to long term; this especially the case in Europe whereas I am much more constructive on emerging economies who are, for all intent and purposes, doing well (indeed almost too well in some cases).

A number of well known proverbs spring to mind here; is the glass half full or half empty? Is this the end of the beginning or the beginning of the end? Whatever metaphor you prefer forward looking indicators point to strong growth in the first half of 2010 (at least). The key message on the real economy will thus be one of divergence and especially how some economies are doomed to deflation and negative growth in nominal GDP (in the context of internal devaluation) while others will fly on the back of excess global liquidity. For me, this is the main meta-discourse currently describing the global economy.

—

[1] – Q1-10 GDP is only available for Lithuania so for the two others the calculations ends with Q4-09.

Read more: http://www.creditwritedowns.com/2010/05/no-recession-in-the-global-economy-but-divergence-aplenty.html#ixzz0oLdc0Jhp