A Slow Patch
By Scott J. Brown
June 6, 2011
The recent economic data have been disappointing, but hardly a disaster. The broad range of indicators suggest a slowing in the pace of growth – not a contraction. One month does not a trend make, but the data have generated some anxieties about whether the current slow patch could be a lot longer lasting or turn into something more severe.
We started this year with a good deal of positive momentum. Inflation-adjusted consumer spending rose at a 4.0% annual rate in 4Q10. Small and medium-sized firms had begun to hire, a critical element in a sustainable economic recovery (we normally look to small and medium-sized firms to account for most of the job creation during an expansion). Bank lending to these firms had begun to loosen. Payroll taxes were lowered by 2 percent, putting more money in people’s paychecks. The economy still faced a number of headwinds (lingering problems in housing, budget strains in state and local government, and an unwinding of the federal fiscal stimulus). However, the positive momentum was expected to offset these headwinds. Back in January, GDP growth for 2011 was expected to be 3.5% to 4.0% (4Q11-over-4Q10). Unfortunately, we hit a wall with gasoline prices. Gasoline was a little over $3 per gallon in late 2010. It was over $4 per gallon in early May. Adjusted for inflation, disposable income rose only slightly from December to April.
Paying more to fill their gas tanks, households have less money to spend on other things. There’s been plenty of anecdotal evidence of a softening in discretionary spending in recent weeks. The question now is whether higher gasoline prices will continue to sap the economy’s underlying momentum. Oil prices are always a wildcard in the economic outlook, but we should see some decrease in gasoline prices over the next several weeks, but it may not be enough to get the consumer sector firmly back on track.
The drag from higher gasoline comes at an unfortunate time. The economy, while improving, is operating far below its potential. There’s a lot of ground to make up from the recession, a lot of people to be put back to work. While most Americans still have jobs, millions don’t, and many workers are underemployed. The unemployed lose job skills the longer they are out of work and new entrants to the workforce aren’t acquiring the jobs skills they would normally get. The unemployment rate has bounced around in recent months, falling from 9.8% in November, to 8.8% in March, then back to 9.1% in May. However, the unemployment rate figures have been suspect. The employment-to-population ratio, which is a more reliable measure of resource utilization in the labor market, has been trending roughly flat over the last year, suggesting that job growth has been sufficient only enough to absorb the growth in the working-age population.
Contractionary policies in state and local government have added to the economy’s weakness. State and local government fell by 30,000 in May, down 291,000, over the last 12 months (in comparison, federal government payrolls ex-census workers rose a whopping 16,000). The contraction in state and local government jobs is not expected to come to an end anytime soon, and may get worse at the end of the school year.
One month does not a trend make. The data merely suggest a slowing in growth (not a contraction), but the broad signs of slower growth raise concerns that recent economic weakness may intensify. For the most part, 2011 is playing out a lot like 2010, with a strong start and a summer slow patch.
The Fed’s $600 billion asset purchase program ends this month. The Fed is not expected to come up with another round of asset purchases. That would take a more substantial deterioration in the economy and a renewed threat of deflation. We’ll get Bernanke’s views on the economy on Tuesday.
(c) Raymond James
Remember, if you have a question or comment, send it to