Economic Risk - Half Full AND Half Empty

 

Location: McLean
Author: Eileen Fitzpatrick
Date: Tuesday, November 16, 2010

There's no need to choose whether the economic glass is half full or half empty; it's both.  For those who see things half full:

·         Momentum has turned back up in the labor market, with October payrolls rising 151,000, more than twice the consensus forecast, and private employment posting an increase of 159,000, its second-largest gain since March 2007 and tenth consecutive monthly pickup.

·         Manufacturing production is accelerating again after a summer slowdown. The ISM survey rose in October to 56.9, the strongest since May.  All the main components—new orders, production, and employment—improved.

·         Consumer spending has been resilient, with a 2.6 percent annual growth rate in the third quarter.  Spending has picked up speed for the past three quarters despite high unemployment, and the recent quarterly growth rate was the most rapid since 2006.     

For those who see things half empty:

·         The housing market is still struggling to regain its footing, and the delays, costs and unforeseen collateral damage from the foreclosure documentation troubles could postpone recovery, or worse.

·         A slowdown in other major economies could be as much a threat to the outlook as any domestically brewed troubles.  Recent sniping over currency valuations hints of retaliation, possibly leading to a trade war.

·         The October jobs report was tepid and hardly cause for celebration.  Job growth is barely fast enough to keep up with a growing population, and will need to pick up a lot more to bring down the unemployment rate.  The number of long-term unemployed (i.e., those out of work for more than six months) remains far above historical norms, even though it has declined more than 8 percent since last spring.

Both points of view are correct.  There has been a spate of good news in recent weeks that suggests the fears earlier in the year about a so-called "double dip" recession were overblown.  The recovery, though, remains too sluggish to do much good right now for the unemployment rate or the housing market. 

This “half full-half empty” view of the economy can help explain the Federal Reserve’s recent announcement of plans to purchase $600 billion of Treasury securities.  The FOMC statement earlier this month noted that they anticipate the economy will continue its “gradual” recovery, but that progress to date “has been disappointingly slow.”  William C. Dudley, president of the Federal Reserve Bank of New York, provided further insights into the Fed’s views on the economy and the outlook in a speech on October 1st.  He highlighted several forces contributing to recent slow growth:  (1)  Deleveraging as households pay down debts; (2)  Business reluctance to hire, which has limited income growth and consumer spending; and (3) Caution in the face of economic uncertainty that has reinforced a tentative growth in spending. 

Mr. Dudley noted that it is quite common for early stages of an economic expansion to encounter a “soft patch”, but he continued that slow growth may persist somewhat longer because “the deleveraging process is not yet complete” (for those keeping track, there’s another “half empty” reference).  He continued, though, with the “half full” observation that the adjustment process had made “significant progress” in terms of reduced debt-to-income ratios and a partial recovery in household net worth. 

We have not made any changes to our outlook for real GDP, which still expects sub-par growth over the near term, followed by a slow acceleration over 2011.  The sluggish nature of the recovery means the unemployment rate will likely remain at or above 9 percent through much or all of next year, with a decline in unemployment only gradually providing relief to the housing market.  The October employment report showed signs that an upturn in hiring may be underway, though, and mortgage rates at record lows are still helping the housing market recovery.  For an economy thirsty for good news, these “half full” signs indicate the recovery continues to move forward.

Opinions, estimates, forecasts and other views contained in this document are those of Freddie Mac's Office of the Chief Economist, do not necessarily represent the views of Freddie Mac or its management, should not be construed as indicating Freddie Mac's business prospects or expected results, and are subject to change without notice. Although the Office of the Chief Economist attempts to provide reliable, useful information, it does not guarantee that the information is accurate, current or suitable for any particular purpose. The information is therefore provided on an "as is" basis, with no warranties of any kind whatsoever.  Information from this document may be used with proper attribution. Alteration of this document is strictly prohibited. © 2010 by Freddie Mac.

 

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