October 25, 2011
It’s amazing what a difference a few weeks makes. Just a little more than a month ago, the nation’s economists seemed to have turned decidedly pessimist, with a few indicating the U.S. economy had already entered a double-dip recession. Even those who were not quite so bleak in their assessment were throttling back on their GDP forecasts for the second half of this year, with many suggesting economic growth in the 1 to 2 percent range.
And what brought about this nasty change of heart, when just a short time earlier these same analysts were anticipating a 3 percent or better second half expansion? Basically, a number of bad reports came out for August. The employment report showed (initially) no gain in total payroll employment, initial claims for unemployment insurance started to trend upward again and consumer sentiment and spending seemed to point to tepid growth.
But then the economic clouds parted and the overcast skies turned partly sunny. The September employment numbers showed a gain of better than 130,000 in the private sector, even as public sector employment continued to track downward. What’s more, those seemingly depressing numbers for August (and July) were revised upward to show jobs growth of nearly 100,000 above what had initially been estimated. As well, the consumer sector showed that it still had some life. As a result, the nation’s tea-leaf readers reversed direction and bumped up their GDP forecasts again. On Thursday, we’ll get to see which of these faces of indecision seem to be correct when the third quarter advanced GDP figures are released. For my part, the growth forecast for the second half remains unchanged since the beginning of the year, that is, the July-December months will likely see the economy grow by a very modest 2.0 to 2.5 percent.
If all of this turns out to be anywhere near the mark, the U.S. economy will once again have shown a remarkable resilience that many analysts seem to underestimate, as their outlooks seem to change with the monthly flip of the calendar. And why does this happen so often? Unfortunately, economists seem to forget some basic statistical theory.
For each set of economic data released by the government, there is always a “margin of error” and a “level of confidence” associated with the information. That’s a fancy way of saying that the data are simply estimates, subject to revision and with the possibility that the survey-based figures may not prove particularly accurate. When added to a process called “seasonal adjustment” (to remove seasonality from the information collected), it means that great care should always be taken when interpreting the likely meaning of the estimated data. Sadly, these cautionary efforts are often ignored.
On the other hand, basic economic theory (which allows us to move beyond individual data gyrations) should provide some clue as to what the future may hold. And when examined on this basis, the possibility of entering a double-dip recession is certainly not passed. Much will depend on a number of factors that will unfold between now and year’s end. For example, as of Dec. 31, two factors will revert back to their original status unless Congress acts; both of which could have a sizeable influence on consumer spending. When the Times Square Ball falls, the two percentage point reduction in the Social Security tax rate that private sector workers have enjoyed in 2011 will end and they will once again pay their full 6.2 percent into the system. As a result, for everyone impacted, after-tax income will drop by 2 percent and potentially cause consumer spending to falter. On that same date, the ability of unemployed workers to move into higher extended federal unemployment insurance categories will end, and within weeks/months, the funds some families currently depend upon for spending will halt.
Beyond the uncertain outlook for people, businesses may also cut back on operations as their tapped-out customers take a breather. In part this behavior is currently being exhibited, as companies continue to stockpile cash to survive another potential downturn. Finally, the biggest current unknown of all is the outlook associated with the European sovereign debt crisis. Should the issue explode into a Greek default, European banks would be placed at risk, liquidity could dry up and another worldwide financial market panic could ensue.
All-in-all, it seems there is still plenty of opportunity for economic growth to falter, even to the point of toppling back into recession, though likely not anytime this year.
Dr. James Newton serves as chief economic advisor to Commerce National Bank and is an auxiliary faculty member in economics and statistics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not necessarily reflect those of Commerce National Bank or OSU-Marion/Newark.