A couple of days ago I posted something from Zachary Karabell, who argued that we've had "enough already" with the doom and gloom surrounding the economy that seems to be everywhere we turn, from newspapers to talk shows to coffeeshop conversations.
While I agree that we've got to begin shifting our mindset towards a recovery rather than a further slide into despair, Krugman's piece, followed by the AP report on unemployment claim levels, makes this transition a rather difficult one to pull off......
Who’ll Stop the Pain?
Published: February 19, 2009
Earlier this week, the Federal Reserve released the minutes of the most recent meeting of its open market committee — the group that sets interest rates. Most press reports focused either on the Fed’s downgrade of the near-term outlook or on its adoption of a long-run 2 percent inflation target.
But my eye was caught by the following chilling passage (yes, things are so bad that the summarized musings of central bankers can keep you up at night): “All participants anticipated that unemployment would remain subst
antially above its longer-run sustainable rate at the end of 2011, even absent further economic shocks; a few indicated that more than five to six years would be needed for the economy to converge to a longer-run path characterized by sustainable rates of output growth and unemployment and by an appropriate rate of inflation.”
So people at the Fed are troubled by the same question I’ve been obsessing on lately: What’s supposed to end this slump? No doubt this, too, shall pass — but how, and when?
To appreciate the problem, you need to know that this isn’t your father’s recession. It’s your grandfather’s, or maybe even (as I’ll explain) your great-great-grandfather’s.
Your father’s recession was something like the severe downturn of 1981-1982. That recession was, in effect, a deliberate creation of the Federal Reserve, which raised interest rates to as much as 17 percent in an effort to control runaway inflation. Once the Fed decided that we had suffered enough, it relented, and the economy quickly bounced back.
Your grandfather’s recession, on the other hand, was something like the Great Depression, which happened in spite of the Fed’s efforts, not because of them. When a stock market bubble and a credit boom collapsed, bringing down much of the banking system with them, the Fed tried to revive the economy with low interest rates — but even rates barely above zero weren’t low enough to end a prolonged era of high unemployment.
Now we’re in the midst of a crisis that bears an eerie, troubling resemblance to the onset of the Depression; interest rates are already near zero, and still the economy plunges. How and when will it all end?
To be sure, the Obama administration is taking action to help the economy, but it’s trying to mitigate the slump, not end it. The stimulus bill, on the administration’s own estimates, will limit the rise in unemployment but fall far short of restoring full employment. The housing plan announced this week looks good in the sense that it will help many homeowners, but it won’t spur a new housing boom.
What, then, will actually end the slump?
Well, the Great Depression did eventually come to an end, but that was thanks to an enormous war, something we’d rather not emulate. The slump that followed Japan’s “bubble economy” also eventually ended, but only after a lost decade. And when Japan finally did start to experience some solid growth, it was thanks to an export boom, which was in turn made possible by vigorous growth in the rest of the world — not an experience anyone can repeat when the whole world is in a slump.
So will our slump go on forever? No. In fact, the seeds of eventual recovery are already being planted.
Consider housing starts, which have fallen to their lowest level in 50 years. That’s bad news for the near term. It means that spending on construction will fall even more. But it also means that the supply of houses is lagging behind population growth, which will eventually prompt a housing revival.
Or consider the plunge in auto sales. Again, that’s bad news for the near term. But at current sales rates, as the finance blog Calculated Risk points out, it would take about 27 years to replace the existing stock of vehicles. Most cars will be junked long before that, either because they’ve worn out or because they’ve become obsolete, so we’re building up a pent-up demand for cars.
The same story can be told for durable goods and assets throughout the economy: given time, the current slump will end itself, the way slumps did in the 19th century. As I said, this may be your great-great-grandfather’s recession. But recovery may be a long time coming.
The closest 19th-century parallel I can find to the current slump is the recession that followed the Panic of 1873. That recession did eventually end without any government intervention, but it lasted more than five years, and another prolonged recession followed just three years later.
You can see, then, why some Fed officials are so pessimistic.
Let’s be clear: the Obama administration’s policy initiatives will help in this difficult period — especially if the administration bites the bullet and takes over weak banks. But still I wonder: Who’ll stop the pain?
END
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| From center left, Barry Rosenberg of New York, John Fromholtz of New Jersey, and Dale Turnage, of Vacaville, Calif., who came to New York for this job fair, stand on line at a National Career Fairs job fair outside the Radisson Martinique On Broadway Hotel Wednesday, Feb. 18, 2009, as they and hundreds of others wait to enter the building. The Department of Labor releases weekly jobless claims figures Thursday. (AP Photo/Craig Ruttle) |
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WASHINGTON (AP) — The number of unemployed workers receiving unemployment benefits jumped to an all-time high near 5 million, while new jobless claims remain well above 600,000. The government also announced that inflation at the wholesale level surged unexpectedly in January, reflecting sharply higher prices for gasoline and other energy products.
The Labor Department says new applications for benefits totaled 627,000 last week, the same as the previous week. But that was still more than the 620,000 claims economists expected.
The number of people receiving regular unemployment benefits edged up to 4.99 million, marking the fourth straight week those receiving benefits have been at a record level. The continuing claims figure also was higher than analysts expected.
The Labor Department also said Thursday that wholesale prices increased by 0.8 percent last month, the biggest gain since last July and sharply above the 0.2 percent increase that economists had expected.
The acceleration was led by a 3.7 percent surge in energy prices with gasoline prices jumping by 15 percent, the biggest gain in 14 months.
Investors will also get a forecast of economic activity. The New York-based Conference Board's January index of leading economic indicators is expected to be flat, according to economists. The index is designed to forecast economic activity in the next three to six months based on 10 economic components, including stock prices, building permits and initial claims for unemployment benefits.
The report is due to be released at 10 a.m. EST.
The Federal Reserve warned yesterday that the nation's crippled economy is even worse than thought and predicted it would deteriorate throughout 2009, with no sign that the housing market will stabilize.
The Fed's bleak estimates indicated that unemployment could climb as high as 8.8 percent this year and that the economy would contract for a full calendar year for the first time since 1991.
The central bank's latest projections came hours after a separate report showed that new home construction and applications for future projects both fell to record lows last month.
Still, some economists saw a silver lining in the otherwise dismal housing report: Scaled-back building should reduce the number of unsold homes and contribute to an eventual housing recovery.
The reports raise the stakes for the plan President Barack Obama announced Wednesday to curb foreclosures and ease the broader U.S. housing slump that sent the economy into recession.
The Fed's latest forecast says the unemployment rate will climb to between 8.5 and 8.8 percent this year. The old prediction, issued in mid-November, estimated that the jobless rate would rise to between 7.1 and 7.6 percent.
Many private economists believe the current 7.6 percent jobless rate — the highest in more than 16 years — will hit at least 9 percent by early next year even with the $787 billion stimulus package signed into law Tuesday by Obama.
The Fed also believes the economy will contract this year between 0.5 and 1.3 percent. The old forecast said the economy could shrink by 0.2 percent or expand by 1.1 percent.
The last time the economy registered a contraction for a full year was in 1991, by 0.2 percent. If the Fed's new predictions prove correct, it would mark the weakest showing since a 1.9 percent drop in 1982, when the country had suffered through a severe recession.
The grim outlook represents the growing toll of the worst housing, credit and financial crises since the 1930s. All of those negative forces have plunged the nation into a recession, now in its second year.
"Given the strength of the forces currently weighing on the economy," Fed officials "generally expected that the recovery would be unusually gradual and prolonged," according to documents on the Fed's updated economic outlook.
In another sign of the troubled economy, production at the nation's factories, mines and utilities fell 1.8 percent last month, more than economists expected. That figure, the third monthly drop in a row, was dragged down by a 23 percent drop in production at auto plants and their suppliers.
Meanwhile, construction of new homes and apartments plummeted 16.8 percent in January from the previous month, the Commerce Department said, falling to a seasonally adjusted annual rate of 466,000 units, a record low. Analysts expected a pace of 530,000 housing units.
Building permits, a measure of future activity, also sank to a record low pace of 521,000 units in January, a 4.8 percent drop from the prior month.
"Conditions in the market for new homes have not been this bad since the 1930s, and they continue to worsen," said Patrick Newport, an economist at IHS Global Insight in Lexington, Mass. He predicted that housing starts would remain depressed for months to come.
But other economists saw some glimmers of hope in the report. The sharp cuts in new home building should help reduce inventories of unsold homes, which reached record levels last year, and stabilize home prices, which have been battered by a flood of foreclosed homes on the market.
Abiel Reinhart, an economist at JPMorgan Chase & Co., said that reduced homebuilding lowers economic growth in the short run, "but it does help get inventories down to more reasonable levels."
Builders have cut the number of new homes on the market for almost two years, Newport said, but sales have fallen even more quickly. As a result, the Commerce Department said last month that it would take 12.9 months to sell all the new homes on the market, the longest on record.
That could drop closer to five to six months by the end of this year, Reinhart said, levels that are consistent with a more stable market.
The housing sector also got a boost Wednesday from the Obama administration, which unveiled a $75 billion effort to prevent up to 9 million Americans from losing their homes.
The plan also will double the size of the lifeline the government is providing Fannie Mae and Freddie Mac to $200 billion each as a way of reassuring financial markets of the viability of both mortgage finance giants.
David Crowe, chief economist for the National Association of Home Builders, said the administration's foreclosure program plus help for first-time home buyers included in the stimulus measure would have an impact.
"I do think we will see a bottom in 2009 and by the end of this year we will start to see the beginning of a recovery," he said. "But it will be a slow recovery because of the significant overhang of empty houses for sale."
The Fed was more pessimistic when it released a set of new economic projections and the minutes of its Jan. 17-19 meeting.
Members of the Fed's open market committee "saw no indication that the housing sector was beginning to stabilize," the minutes said.
While falling home prices and historically low mortgage rates have made homes more affordable, the Fed said, "concerns that house prices may fall further appeared to be holding back potential buyers."
Despite the lower unemployment and overall economic projections from the Fed, Joshua Shapiro, chief U.S. economist at MRF Inc., said the growth estimates for this year and next remain "much too optimistic."
The Fed forecast calls for the jobless rate to dip to between 8 and 8.3 percent next year, and to between 7.5 and 6.7 percent in 2011. The normal range for unemployment is around 5 percent.
Employment is usually the last piece of the economy to heal once the country is out of recession and in recovery mode. Businesses are usually reluctant to ramp up hiring until they feel confident that any recovery has staying power.
Under the Fed's new projections, the economy should grow between 2.5 and 3.3 percent next year and by as much as 5 percent in 2011, which would be considered robust.
Shapiro is not convinced. The central bank's forecasts are in the "'hope springs eternal camp,'" he said.
Probably will, now, and once again it will leave the folks on the street out, since while 2 bux ain't much for those of us with jobs, it's a helluva lot to people who have to decide whether to crap in a toilet or eat today.
