Hiccups on the road to economic recovery!

Last week’s column referred to two important ongoing debates concerning the future course of the global economic crisis. One is, whether references to signs of recovery and the emergence of green shoots in current economic trends are pure political spin or are based on secure factual evidence. The other is, which is preferable of the two contrasting official policy responses to the crisis: counter-cyclical action, as exemplified in various stimulus packages, or pro-cyclical action, which permits private markets to run their courses and thus determine, through profit-loss rules, economic outcomes for businesses and consumers. As noted in last week’s column, both policy stances carry huge economic, social, cultural, political, and environmental risks. My own preference, however, borne out of practical experiences in Guyana and the Caribbean is for the former policy stance.

Last week, I was at pains to point out that these debates have an important bearing on the eventual shape of the GDP growth curve over the recession and recovery period. I demonstrated this with reference to the three curves economists commonly use to describe the recession-recovery period, namely, curves shaped like the letters V, U and an elongated L.  The distress caused by the recession varies according to the shape of the curve.

The W curve
There is a fourth curve that I did not mention, because of its rarity. Now I am not at all certain it would not be applicable in this instance. That curve is represented by the letter W.  With this curve, the economy falls into steep decline, then it starts to recover, but not as rapidly as in the decline. Unfortunately, the recovery does not last long and soon the economy is plunged into another steep decline.  Finally, there is a steep and lasting ascent out of the recession.

Political spin
On balance, it seems to me that political spin is trumping factual evidence. While it is true that over the past three months, stock market gains have created a sense that conditions if not getting better, are not-worsening, I believe one’s judgment should be based on other economic indicators. I shall try to touch on some of these in this column. However, I do not wish to leave readers with the impression that stock market behaviour is totally unreliable. It is a useful supplementary gauge of business confidence and the outlook of firms. It can also impact on consumer confidence, since incessant media exposure of positive movements in stock market indices convey a ‘good feel’ that prospects are improving for all participants in the economy, not only buyers and sellers of stocks.

Other indicators
As the leading global player, I have four major concerns about the US economy.  One is that, the housing crisis, which is at the epicentre of its economic woes is far from settled. Over the first quarter of this year (2009) housing prices fell by one-fifth. This is a sobering reminder that the problem, which is at the core of US economic distress, continues to worsen.

Second, the toxic assets (mortgages) associated with the bursting of the private housing market bubble have not disappeared. As a result the credit crunch (squeeze) has not dissipated into thin air. Until these toxic assets are effectively removed from the system, financial institutions will remain inherently unstable, no matter what are their share price valuations on stock markets.

Third, consumer spending in the US is still in decline. This is on account of both the huge wealth looses associated with the collapse of the private housing mortgage market and income losses due to job losses as a result of the economic recession. Further, the credit squeeze on consumers is resulting in a reduction of the number of credit card holders. As banks rein in on credit card issues and credit card debt, consumers continue to run away from the purchase of big-ticket items at this time. Fourth, there are presently massive reverses in several real sectors of the US economy. Nowhere is this more clearly seen than in the automobile sector. Not only is this sector the leading group in US manufacturing, but it also has huge negative multiplier effects arising from declines in 1) its purchases of supplier inputs (automobile parts and steel) 2) operations of its distributive outlets (dealerships) and 3) financing firms.

Several other sectors have also been adversely affected by what has already been so far, the worst economic recession to hit the US economy since the Great Depression of the 1930s. These include airline travel, hotels and accommodation, restaurants, consumer durables, and electronics.

Getting better: job losses
Because of political spin, US employment data for the month of April 2009 is being touted as concrete evidence of a reversal of economic fortunes. Is this an accurate portrayal? While it is true that the US Bureau of Labor Statistics has registered fewer jobs lost in April this year than the preceding month (March), the overall unemployment rate remained at an historic high of 8.9 per cent during April. Indeed, over 539,000 jobs were lost in April, bringing the total of persons who have lost jobs to 5.7 million, over the entire recession period, December 2007 to the end of April 2009 (16 months).

Four other related considerations are of note. One is that these data on employment/ unemployment do not include the sharp rise in part-time employment. That is, persons looking for full-time jobs who end up working part-time (underemployment). The second is that there is a significant variation in the unemployment rate across regions and groups in the US. For example, the rate is much higher for areas where automobile industries are located (particularly General Motors and Chrysler now in Chapter 11 bankruptcy), than elsewhere. Also, among African-Americans the unemployment rate is as high as 15 per cent. The rate for men at 10 per cent, is also higher than that for women.

A third related consideration is that the number of claimants for unemployment benefits continues to increase noticeably. And, finally, the ratio of job-seekers to existing vacancies is now as high as five to one (5:1).

Some commentators claim, these represent only ‘hiccups’ on the road to recovery! Is this true? Next week I shall take up the discussion from this point.