THE BUSH ECONOMIC TEAM SAYS IT IS WORRIED. Its key players fret that life has gotten difficult for Americans with incomes below the middle level of around $45,000 per year. High gasoline prices are hitting the wallets of workers who must use their cars to get to work and the pocketbooks of moms who shuttle their kids to school, soccer games, and other activities.
Add to that rising healthcare costs, which are hurting those with insurance, by forcing premiums up, and squeezing the uninsured, who struggle to buy the medications that pharmaceutical research has made available to them.
But this is an administration with no mechanism for developing coherent plans to solve these problems. Add a Democratic opposition which has decided to oppose any plans that might emerge from the White House and you have political stalemate. The administration knows gasoline prices are a problem, but the energy bill that the president has been pushing contains neither an immediate nor a long-term solution. And the healthcare costs that are bedeviling most voters are largely ignored by a president who has chosen to spend his political capital on his plan to reform the Social Security system, even though most Americans are quite content with the existing system.
Worse still ,from the administration’s point of view, economists trusted by the president are predicting an economic slowdown (the “r” word, recession, is studiously avoided) in the summer of 2006. That’s just about when the congressional election campaigns will be getting underway.
Fortunately, the American economy is too vibrant to be stifled by politicians. The new review of regional economies, prepared by the Federal Reserve Bank of Atlanta for use by Fed policy makers, reveals that “business activity continued to expand . . . through May. Most [of the 12 Federal Reserve] Districts . . . characterized the pace of expansion as moderate, solid, or well-sustained. . . . Labor markets improved in most districts.” In the past year the economy has grown by 3.7 percent, a figure that experts agree is satisfactory and sustainable.
Even better, this growth is not triggering inflation. “Overall price pressures were moderate,” continues the report. Consumer prices (excluding volatile food and energy prices) rose only 0.1 percent in May, and by only 2.2 percent in the past 12 months.
This doesn’t mean that the economic news is unambiguously cheery. It never is. The auto and airline sectors, loaded down with so-called “legacy costs” stemming from concessions made to trade unions at a time when costs could be passed on to consumers, are struggling. Retailers are also worried: sales fell 0.5 percent in May, the first decline since August. And the May jobs report was a disappointment.
But the May drop in sales may be a blip, following a 1.5 percent increase in April. The retail sales figures were hit by a decline in gasoline prices, which lowered takings at gasoline stations by 1.6 percent. That’s hardly bad news. Meanwhile, continued strength in the housing sector drove up sales of building materials and furniture. Overall, retail sales in the past three months have grown at an annual rate of 5.6 percent.
Then there is the modest increase of 78,000 in payrolls in May, the smallest increase since the summer of 2003. But a look at all of the labor market data tells a happier story. The unemployment rate is a low 5.1 percent; the percentage of the population employed, 62.7 percent, is at its highest level in over two years; and the low May figure came on the heels of a substantial 274,000 increase in the number of new jobs in April. Add in the rise in the number of self-employed entrepreneurs, and you have a jobs market in which employers are having “difficulty finding specific types of workers,” to quote the Fed report.
THERE YOU HAVE IT, an economy that Fed Chairman Alan Greenspan told a congressional committee “seems to be on a reasonably firm footing, and underlying inflation remains contained.” So why will he not leave well enough alone, and end the regular ratcheting up of short-term interest rates?
For one thing, there is some evidence that the recent decline in productivity to a more normal 2.5 percent annual rate from the extraordinary 5.5 percent during 2003 might presage a spurt in unit labor costs. Add anecdotal evidence that some corporations are recapturing long-lost pricing power, and there is a danger that rising labor costs will translate into rising prices.
Then there is what the Greenspan calls “among the biggest surprises of the past year”. Long-term interest rates have fallen, despite the Fed’s increases in short-term rates. Those low rates have fueled a boom in homebuilding and sales, and what the Fed chairman characterizes as “a steep climb in home prices.” Not a bubble he says, but “signs of froth in some local markets where home prices seem to have risen to unsustainable levels.”
True, Greenspan has repeatedly made it clear that it is not his job to identify and prick bubbles, either in the share prices or house prices. And we don’t know whether he thinks it is his job to blow “froth” off the housing market. But he is, in the end, a central banker, and one who knows that the combination of rising unit labor costs, a return of pricing power, a Congress about to pass an expensive, 1,000 page energy bill, and interest rates so low as to make it almost costless for homeowners to borrow money (interest payments are tax-deductible), are not conducive to price stability.
The last thing Greenspan wants to do is leave office in the midst of a new inflationary surge. So look for him to continue raising interest rates as he and his monetary policy colleagues hunt for the economist’s Holy Grail, the neutral interest rate that neither speeds up nor slows the economy.
Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.
