This should be a fine year for the economy.  Sage in its typical fashion continues to take a cautious approach to forecasting.  Our model suggests that the U.S. economy will expand in the mid-two percent range this year, the global economy a bit more.  But the domestic economy could easily surprise to the upside. 

A cursory look at recent post-recession years may be instructive.  In 1983, the U.S. economy expanded 4.5 percent.  In 1992, the economy expanded at a 3.4 percent pace and in 2002 at a 1.8 percent pace.  Take the average of those figures and you get around 3.2 percent, which is better than our baseline forecast.  But look more closely at the numbers and you also see a disturbing trend.  Recoveries from recessions are becoming less dynamic, which means that the economy could underperform expectations, too.

Over the course of this year, this blog will chronicle the performance of the U.S. economy and point out a variety of influences.  It will also discuss key economic policy issues in the U.S. and in the nation’s Mid-Atlantic region, including in Sage’s home state, Maryland.

-AB

This week, two important institutions in the Baltimore area faltered, reminding us why we hate recessions.  From what I’ve observed, Bradford Bank was a lovely local institution led by fine people.  The fact that the bank ran into such significant economic/financial difficulty is testament to the fact that it was a lender; a participant in our community’s development.  I’m not suggesting that issues of liquidity and solvency aren’t important, only that I retain a fondness for local institutions led by locals and we’ve just lost another one.  That said, I’m fully aware of the value that the M&Ts, PNCs and Bank of Americas generate for a large metropolitan economy, but like many people, I have a tendency to root for the little guys, too.

We also lost a truly distinctive place at which to dine, the Brass Elephant restaurant in Mount Vernon (perhaps temporarily??).  When I was first married, this is one of the first places I took my wife in order to impress her with her new home.  Like many, I hope the restaurant comes back better than ever.

I’m also hopeful that I’m right that the recession is over.  Despite the ongoing departure of enterprises precious to us, the fact of the matter is that things could be much worse.  The economy has improved roughly a quarter before I thought it would, though I remain concerned that much of the uptick in activity recently is merely temporary and that economic demons are simply waiting for the federal government and Federal Reserve to look in a different direction (akin to 1937-38).

-AB

Many economists are tickled pink because the U.S. economy shrank at just a 1 percent annualized rate during the second quarter.  That was better than the consensus estimate of -1.5 percent.  Investors also seem pretty happy and as of this writing the Dow is racing toward 9,300, the S&P is above a 1,000 and the NASDAQ is above 2,000.

That said, I remain a bit of a skeptic.  I, too, think the recession will end later this year, but I believe the chances of another recession within three years of the end of the current one are above 50 percent.  So much of the current recovery is artificial and motivated by factors such as a 0 percent Fed Funds rate, $8,000 tax credit for first time homebuyers and of course cash for clunkers.

What happens when these inducements go away and tax increases come on top of that?  You should put a big red circle around the year 2012.

-AB

It’s true – the recession will be over in a few months.  A few economists actually believe that it is already over based upon a number of factors, including improving home, retail and auto sales.  I’m not one of them, but perhaps I pay too much attention to the labor market, which remains awfully weak.

Though economists differ regarding when the recession will end, there appears to be near unanimous agreement that the recovery will be a sluggish one.  I am in this camp.  There are a number of reasons for this – let me list a few:

·         Household balance sheets are still overleveraged and the debt service ratio remains high;

·         Commercial real estate’s downturn has just begun and many key sub-segments will require years to recover;

·         Unemployment will continue to rise during the initial months of economic recovery, probably rising to 10.5%-11% by sometime next year;

·         Housing prices continue to decline, due in large measure to rising delinquencies, defaults and foreclosures;

·         Corporate earnings, though improving and beating expectations presently, will not expand briskly in 2010 in many key industries, including those that serve consumers directly – I believe that consumer behavior has been permanently altered and that we will remain over-retailed from a supply perspective for quite some time;

·         The global economy, with the notable exception of China, remains weak, which will hamper export growth (though exports were up in May, a pleasant surprise);

·         Fears of shifting regulations, future tax increases and interest rate hikes will dampen business enthusiasm in 2010;

·         Immigration will not drive the economy forward as forcefully as it has in the past;

·         Income growth will remain weak, particularly since many of the manufacturing and distribution jobs that have been lost during this cycle will not be regained; and

·         State and local governments remain under significant fiscal duress – California and New York State come to mind, though as everyone around here knows, the State of Maryland has its own set of issues.

-AB

Wow – just like that and everyone is pessimistic again – all it took was one bad employment number (June, -467,000 nationally).  All of a sudden, the green shoots are dying and people are sincerely talking about another year of recession – as of this writing, the Dow is slightly below 8,300, down more than 5 percent year-to-date.  Oil is down to $63/barrel, a reflection of growing pessimism throughout the world (notable exception:  China). 

Though we have been among the most pessimistic analysts of the economy, we still believe the economy will find its way out of recession very late this year or early next year.  There are a number of indicators that suggest this, but one can imagine how intense the pressure has become to start shoving stimulus dollars out the door.  The VP has indicated that the administration “misread” how weak the economy was when he and the President entered office, and though that’s probably a poor word choice, this is now Obama’s economy and presumably he will work to turn it around sooner rather than later. 

-AB

I really am tired of playing the part of the pessimist.  Like other economists, I want to talk about green shoots and better times for America and the rest of the world in 2010 and beyond.  But I remain deeply troubled by the direction of things.  Unlike other pessimists, I am not totally fixated on what government is doing – after all, government was invited to the party by the private sector and no one should have been surprised that such a hulking guest has come to dominate the festivities.  I’m actually quite tired of people who insist on blaming government for everything and don’t see the fact that virtually all of us are to blame in some way.

It remains my contention that much of our difficulty emerges from household behavior – we have within the course of three generations shifted from functioning extended families capable of investing substantial time and resources to the raising of young people to dysfunctional nuclear families that allow too many children to meander through streets and schools without focus and without hope.  In 1970, 40.3 percent of U.S. households were characterized as married couples with children (U.S. Census Bureau).  By 2005, this proportion stood at just 23.1 percent.  By contrast, the “other family households” category rose in proportion from 10.6 percent in 1970 to 16.7 percent more recently.  The proportion of households comprised of “men living alone” rose from 5.6 percent to 11.2 percent over the course of this 35-year period. 

Not surprisingly, because of the inefficiencies inherent in broken families (e.g., maintaining two residences rather than one), these families are often incapable of marshalling the resources necessary to properly invest in young Americans.  The response to this lackluster family/household performance has been to scapegoat schools for everything from juvenile crime to globally embarrassing academic achievement.  My sense is that many schools and educators have improved due to intense scrutiny, but the outcomes remain less than satisfactory because students spend only a small fraction of their time in school buildings and much of their behavior is shaped by the community itself.  Others view the lack of school quality as part of a broader conspiracy to perpetuate generational poverty – toward what end one scarcely knows.

Poor behavior is also apparent in the boardroom and all Americans should be shocked at just how poor corporate leadership has been in recent times, from Enron and WorldCom to GM and Chrysler.  Deficiency ranges from all-out corruption to a fixation on the next quarterly earnings statement and nothing else ever after.  To deflect attention from the inadequacy of their performance, many of America’s most visible business leaders blame government for excessive taxation and regulation with one hand even while taking bailout money (financed with current and future taxes) with the other.

At the same time, too many Americans have convinced themselves that we are stylishly post-industrial and can extend prosperity while producing nothing that anyone can physically consume. American agriculture remains a blessed exception, though even here there is excessive reliance on government subsidy and involvement.

The fact of the matter is that for things to be right in America again, Americans have to get things right.  Ultimately, that means that Americans must produce for Americans and for others.  This is not a protectionist rant – rather we have to get smarter.  Here’s how:

·         Insist on fair trade and a floating currency with the Chinese – if they sell our bonds and interest rates go up, so be it – the time to end financial dependence on China, etc. has arrived;

·         Reorient the stimulus package to put more money into basic federal and private research and development with the goal of massively accelerating American innovation;

·         Have a frank dialogue regarding the role of unions in the modern economy and the extent to which they can increase productivity rather than acting merely as agents of redistribution;

·         Put money into high-speed rail on the East and West coasts, fix the air traffic control system before tragedy forces us to, and create a 21^st century electrical grid;

·         Reform Social Security and Medicare right now – we know we can’t afford it, why are we trying?

·         Implement tort reform to drive down the cost of healthcare today and forever – preserve exceptions to damage caps for truly malicious behavior;

·         Implement a buy American campaign at every level of government and society – I’m tired of seeing American flags pasted to the rear of Hyundais;

·         Accept the fact that marriage is a good thing and that the rearing of children in the context of stable family situations is to be encouraged;

·         Embrace legal immigration, particularly for those who would bring to America scientific and mathematical skill sets – the face of America changed with the last election, let’s use that to call out to the world’s brightest to come to our shores, making us stronger and their  respective nations of origin competitively weaker (nothing personal, just capitalism); and

·         Increase household savings – this has already happened in recent months – it needs to be part of a broader, longer-term phenomenon that will allow America to finance (and profit from) her own investments.

-AB

As has been the case with a number of economic data releases in recent weeks, simple interpretation of today’s jobs report is not possible.  While the number of jobs lost in May fell far short of the consensus estimate of negative 525,000, the unemployment rate rose above the consensus prediction of 9.2 percent (9.4%).

The latest employment report should hardly be viewed as good news.  The adult male unemployment rate in the United States is now 9.8 percent, a reflection largely of the significant declines in employment opportunities in goods producing industries like manufacturing and construction.  Anecdotal information indicates that an elevated proportion of recent college graduates are having difficulty securing employment, even if they are emerging from some of the nation’s more prestigious institutions.  This phenomen helps explains the relatively sharp increase in unemployment last month.  The implication is that the United States remains mired in a period characterized by flowed income growth and stressed industries.  The hope is that the pace of employment loss continues to wane in June and during the months ahead

For weeks, the search for “green shoots” has become a preoccupation for the nation’s economists.  So many green shoots had been identified in the form of improving home sales, durable goods orders, retail sales and initial jobless claims that many economists seem to have convinced themselves that economic recovery is imminent.

It is not.  The latest retail sales numbers, indications of climbing foreclosures, and losses on Wall Street in recent days remind us all that we are still mired in the deepest recession in decades.  Remarkably, many economists and the broader market took the BLS’ initial employment release for April (-539,000 jobs) as good news.  But when one factors in downward revisions to prior months and the fact that the jobs numbers were artificially inflated by Census Bureau hiring, the April employment numbers were roughly as dire as releases characterizing previous months.

With the automotive supply chain now buckling, more job losses are ahead as we approach and enter the summer months.  Though the economy is still set to improve later this year, that improvement will come only after further damage is done during the months immediately ahead.

-AB

The March unemployment data for Maryland are now available and they are shocking. The Free State’s unemployment rate is now on the verge of 7 percent (6.9% to be precise, the highest level since April 1992). Jurisdictional data are available through February, and they too serve as a wake-up call. Maryland’s recessionary defenses have been completely overwhelmed.

At 5.1 percent, Montgomery County enjoys Maryland’s lowest unemployment rate. But just one year ago, the county’s unemployment rate was just 2.7 percent. Similarly, Howard County’s unemployment rate has risen from 2.6 percent to 5.2 percent over the past twelve months. Baltimore City’s unemployment rate, which stood at a benign 5.6 percent in February 2008 now stands at a socially disruptive 10.4 percent. There are now ten jurisdictions in Maryland with unemployment rates exceeding nine percent. The state’s highest unemployment rate is in Worcester County (16.5 percent, up from 10.0 percent a year ago).

Without question, unemployment in Maryland is set to go much higher. By the end of the year, expect an unemployment rate standing at 8 percent or more. That would still be well below the corresponding unemployment rate expectation for the nation, which is roughly 10 percent by the end of ’09.

-AB

Yesterday’s dismal March retail sales release (-1.1%) was a reminder that the end of the ongoing downturn remains many months away.  The optimists within us have been focusing on the stock market’s recent rallies, durables orders data, upticks in new and existing home sales and better than expected retail sales earlier in the year. 

Today’s consumer price index release reinforced the notion that the corporate sector remains under pressure.  Aggregate price levels are down 0.4 percent over the past year, though this is essentially explained in full by lower energy and food prices.  Consumers still face prospective inflation in the health sector, however, and it will be interesting to see how rising pharmaceutical prices and hospital charges impact the ongoing debate regarding the future of America’s healthcare system.

-AB