This was not the cheeriest of holiday weekends. Yes, we still celebrated our Declaration of Independence from the British oppressor some 233 years ago. And yes, many towns had parades and fireworks to celebrate that event. And yes, “Big Pay Packages Return to Wall Street”, headlined the Wall Street Journal. Goldman Sachs is on course to pay bonuses of $20 billion, or $700,000 per employee, twice last year’s payout, and Morgan Stanley is projected to top last year’s bonus pool of $262,000 per employee with checks close to $340,000.
But we fired up our barbeques only after hearing that some 457,000 non-farm payroll jobs had disappeared in June, bringing the total number of jobs lost in this recession to 6.5 million and the number of workers in search of jobs to 14.7 million. The jobless rate has risen to 9.5%, almost double the rate when the recession began to bite, and the highest in 26 years. In addition, millions of workers have accepted pay cuts and reductions in hours of work. Things are so grim in some towns — 15 metropolitan areas have jobless rates in excess of 15%, and Detroit clocks in at 14.9% — that their mayors diverted funds from their fireworks and parade budgets to supplement food banks and other programs to ease the plight of the unemployed.
The Obama administration’s economists got it wrong. When the President was pressing for passage of his stimulus package, they predicted that it would create millions of jobs and cap the unemployment rate at around 8%. Congress gave the President the $789 billion he asked for, but the promised 2.5 million jobs have not materialized. To which the Obama team would add, “Yet”. It turns out that the label “stimulus” was slapped on a grab-bag of spending projects that could not be initiated in time to affect the jobs market — only some 15% of the stimulus money has been spent. Or it just might be that borrow-and-spend is not the route to recovery. In any event, the failure of the stimulus to work as advertised has not added to the credibility of the administration’s forecast of the effect of the health care program it is trying to push through a skeptical congress, especially since soaring budget deficits now rank with health care as a major concern of voters.
The pre-holiday jobs report resulted in a spate of new forecasts. The gloomier analysts point out that consumers, who account for 70% of the economy and who have already pushed the savings rate close to 7% after years in negative territory, will be more inclined than ever to eschew that trip to the mall. Perhaps most important, lay-offs, which originally hit young workers the hardest, are now affecting what The Lindsey Group consultancy calls “breadwinners”, men and women who head households.
Fear of what is to come is making even the nine-in-ten workers who have jobs cautious. Karlyn Bowman, the American Enterprise Institute’s doyenne of poll analysts, tells me, “Most Americans say they are cutting back because they are worried things might get worse, not because they need to make cutbacks now.”
Furthermore, many consumers can’t get credit on affordable terms: in a move that gives new meaning to the term “chutzpah”, Citibank, which lives on government support, raised rates on outstanding credit card balances to beat the impending government restriction on such moves. Other banks are making it more difficult for consumers to get credit, not a bad thing after the pre-recession lending surge, but a drag on the economy nevertheless.
But there is also a good deal of evidence suggesting that the worst is over. Start with the housing market. Pending home sales are up, and the 0.6% decline in average prices in April was far less than the 2.2% drop in the previous month. Thirteen of the twenty metropolitan areas covered by the Standard & Poor/Case-Shiller index recorded increases. There is little doubt that foreclosures and subsequent sales at distress prices will continue to depress the market, but homebuilders are starting to see a pick-up in traffic in response to their own price cuts and still-attractive mortgage rates.
Conditions in money markets are somewhere between calm and buoyant. As investors become convinced that the world is not coming to an end, they are moving into riskier assets, and out of super-safe Treasury bonds. Companies have found investors eager to snap up investment-grade bonds, and have issued such paper in record amounts. Indeed, even high-risk corporate bonds are once again attracting investor interest: their price rose 22.4% in the quarter just ended. The ability to tap investors for cash is an important offset to the reluctance of many banks to lend — businesses in effect are eliminating the middle man. (The joke making the rounds is that businessmen went to see his local banker and announced that he had come to discuss a loan. “Great”, replied the banker, “How much do you want to lend us?”) And the commercial paper market, to which businesses turn for short-term financing, is returning to more normal level.
Even financial institutions, the sick men of the economy, seem to be on the road to some semblance of health. Many have raised sufficient capital to pay back the TARP money the government made available to them when it looked as if the financial system was on the verge of collapse. The banks are not out of the woods, of course. Still on their books are billions in toxic assets, and there is little hope that the government program to purchase these writedowns-in-waiting will succeed, although we will know more when the firms the government has selected to manage the program swing into action — or inaction. Nevertheless, fears that the financial system will implode have given way to guesses at the pace of the continued recovery of financial institutions many of which, by the way, are once again hiring.
Banks are not alone is seeing better times. Inventories have been drawn down sufficiently to force some restocking, boosting the hard-hit manufacturing sector. Activity increased for the sixth month in a row, and not only in the U.S. The Financial Times led its pre-holiday edition with a page-one headline, “Data show evidence of global recovery, Manufacturing in big economies picks up”. But every silver lining has a cloud: the paper also noted “concerns that upturn will not be sustained.”
Here is how Americans are parsing all of this information. According to a CNN/Opinion Research Poll (taken before the latest jobs report) 60% think the economy is starting to recover or that conditions have stabilized (12% and 48%, respectively), and 40% that conditions are continuing to worsen. Support for the President’s economic policies has slipped from 65% to 58%, with independent voters leading the drift away from Obama.
The president’s team is making the rounds of the television stations to describe the jobs report as only one data point — no surprise there. But they are also hinting that another stimulus might be on the way. That prospect sends chills down the spines of deficit hawks at the Fed and in the financial community. Roger Altman, chairman of Evercore Partners, an investment banking boutique, and Bill Clinton’s deputy secretary of the treasury, says the deficit is already so large that “sometime soon, perhaps in 2010 . . . we’ll have to raise taxes.” Since it won’t be possible to squeeze enough out of “the rich”, the president’s promise of no new taxes for the middle class, probably anyhow doomed by the need for funds to pay for his health-care plan, can be considered no longer operative.
Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).
