A new Bloomberg survey of 62 prominent economists shows that most are feeling more optimistic about the economy than they were a few months ago. They're now predicting 3% GDP growth for 2010 and 2011. They also believe that unemployment has peaked and will decline to 9.5% by year's end. I certainly hope their optimism is warranted, I'm just not convinced.
So what are some of the reasons for the economists' cheerier attitude? Bloomberg reports one saying:
"Consumption has been on an uptrend," said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York. "The main reason for the pickup in recent months has been an improvement in the labor market."
I'm not sure what improvement in the labor market Maki is talking about, but he must be looking at different numbers than what I've seen. According to the Bureau of Labor Statistics, the non-seasonally adjusted broader measures of unemployment have worsened in recent months -- not improved. Unemployed plus discouraged workers went from 9.9% to 10.2% to 11.2% from November to December to January. If you add in marginally attached workers, then the percentages changed from 10.7% to 11.1% to 12.0% over the same period. These are the numbers that matter if you want to understand whether Americans will be more comfortable spending.
Consumption could be improving because there's a perception that the labor market is improving. After all, the prevailing, generally reported unemployment rate tells a more positive story. Employed Americans are also probably beginning to believe that if their job has survived this long, they may be safe. But that perception isn't reality yet.
What's worse is that this potential consumption growth is limited to the optimism of those who are employed. That 12% I just mentioned above needs to experience actual labor market improvement, meaning jobs, to begin spending freely again. Once the rise in unemployment really does end, consumption should quickly plateau for those who are employed. Then, any consumption growth will be limited to employment growth, which is still expected to be quite slow. Even by these optimistic economists' standards, unemployment will only decline by 0.2% (from 9.7% to 9.5%) through year's end.
Here's another economist:
"It's a matter of time before strength in the economy effectively feeds on itself, with more employment leading to stronger spending, which in turn leads to more employment," said James O'Sullivan, global chief economist at MF Global Ltd. in New York. "The key is going to be the business sector leading the way and consumer spending following."
I disagree with the first part of this statement, insofar as he believes that "matter of time" is imminent. Certainly more employment will lead to stronger spending, which will feed on itself, as he says. But as I just mentioned, we aren't going to have much more employment all year.
But I agree with the second part of his statement. I've mentioned before that business spending will likely have to lead the way to recovery. But I remain unconvinced that business spending will be strong enough to have a major impact in employment. After all, 70% of the economy comes from consumer spending, so business only has so much power over growth. Unless consumer demand increases, businesses will have a hard time causing each other to need to increase production significantly and ramp up hiring.
I also generally wouldn't put as much weight into economic performance over the past few months when it comes to employment and spending. The holidays are an unusual time, where firms fire fewer people and consumers spend more money. I'd prefer to see how the economy does through spring before changing my view about the economic path we're on.
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