The future of the recovery is still in doubt, and it all depends on which economic doctrine comes out on top on November 6th.
Today’s jobs data from the Labor Department were disappointing but not a disaster — at least not yet. The creation of 115,000 jobs is not adequate to bring the unemployment rate down consistently. The drop in that rate to 8.1 percent had to do with people leaving the workforce, not the creation of an adequate number of jobs. Contrary to what is widely written, however, the numbers do not necessarily mean the economy is slowing down. There is probably now a problem with the seasonal adjustments. Something has changed, and the most likely culprit is the warmer-than-usual weather.
The seasonal adjustments probably inflated the data on growth earlier in the year and are probably deflating it some now. We are likely growing at a pretty even pace, not slowing down significantly. Let’s not forget that recoveries do have a momentum of their own, and manufacturing is making something of a comeback. There is also some notable rundown in consumer leverage.
This is good news, but not good enough. The pace is still too slow. By now we all know about the headwind of consumer debt and lack of adequate mortgage relief. That leverage is not being diminished fast enough, and it is likely as the Obama stimulus fully peters out that there will be ongoing government contraction — especially as state and local governments continue to cut back.
It would be nice to see Washington pay some attention to this potentially serious weakness — along with two other factors. The first is continued recession in Europe, which in turn will weaken its finances further. Austerity has been the disaster we long warned about. The U.S. sells to Europe and it owes us money, not least our money market funds.
Second, a bunch of significant contractionary policy matters come to a head at the end of the year. The Bush tax cuts end, as do emergency unemployment benefits, the payroll tax cut expires, and Congress is supposed to implement $1.2 trillion in spending cuts because the Super Committee failed to agree on its own cuts.
Many have written about this “cliff” and understand nothing will be done until after the election, which leaves less than two months to do anything. Most think there will be some kind of postponement of the issues by Congress because there won’t be enough time to do anything substantive. But then what? Much will depend on the election outcome.
So much attention has been given to deficit reduction in the U.S., and by the Obama administration until only last fall, that we are now in a dangerous rut. We need fiscal stimulus and we are not going to get it. The economy is hardly strong and can be easily toppled into a new recession. Then deficit projections get still worse. It's hard to be optimistic in this environment. I believe the Obama administration took its eye off the ball since the start. The focus should have been jobs, and I don’t think the attention paid to health care legislation was a sufficient excuse. They would have missed the ball anyway.
But given the nation’s current straits, this November’s election is one of the most important elections of our lifetime. If it goes well, jobs and growth have to be at the top of the agenda, not deficit issues. An Obama loss means austerity and recession again. Budget cuts will be demanded at the expense of the elderly, the poor, and the new health care bill. If Obama wins but Democrats lose the Senate, it will be significantly better but not a panacea. Muddling through, which is what we’d get, may also mean recession.
A Democratic victory in the House and a filibuster-proof Senate would be too grand to bank on, but not impossible. Even then, it would all depend on aggressive leadership by Obama that favors growth. Fiscal responsibility can come later.