Call it the Snooze Economy. Roughly two months before the presidential election, the economy has turned both boring and mystifying. It hardly impresses anyone, and yet this plodding performance is probably helping Hillary Clinton by minimizing bad economic news. More important: The lackluster expansion, if continued for a few more years, would represent an enormous achievement. It would finally erase most of the losses of the Great Recession.
Of course, whether it will continue a few more years, or even through the election, are open questions. The truth is that we don’t know how strong or weak the economy is. The most reliable economic indicators are not enlightening, because they’re telling opposite stories.
On the one hand, gross domestic product — the economy’s production — suggests that the economy could be on the brink of recession. In the first half of 2016, “real” (inflation-adjusted) GDP rose at an annual rate of about 1 percent. A recession usually occurs when the GDP declines for two consecutive quarters. By contrast, job figures depict a booming economy. Payroll jobs have increased at an average of almost 200,000 a month in 2016; the reading for July was 255,000.
The conflict is inescapable. In a commentary, economist Joseph Carson of AllianceBernstein put it this way:
“As a rule, companies add to existing headcount when the demand for their goods or services is on the rise and/or backlogs are growing that eventually will require a greater amount of labor input. Yet [recent GDP figures don’t reflect] business conditions that would get companies excited about adding . . . staff.”
On paper, these diverging views can be reconciled. One or both of the statistical guideposts may be flawed. It’s possible that GDP doesn’t accurately include — for technical reasons — the contributions made by the Internet and social media. If so, then the economy’s output is undercounted, and growth is stronger than the official figures report. Carson takes this position.
By contrast, the job statistic could be what economists call a “lagging indicator.” Employers’ hiring and firing decisions reflect recent experience more than future predictions. Employers don’t start hiring until a recovery is well established; similarly, they keep hiring until a recession hits them in the face. If so, today’s robust hiring could signal false optimism. The weaker GDP figures may better reflect reality.
Other confusions abound. According to the Commerce Department, after-tax corporate profits dropped 5 percent in 2015. The weakness has continued this year. No matter. Stocks are trading near record highs, and the Wall Street Journal last week headlined an analysis, “It’s Getting Scarily Quiet in the Stock Market.” The story noted that “volatility” — day-to-day price changes, in either direction — is the lowest since 1995 by one measure.
Naturally, there’s a possible downside. “The quiet market . . . has led some to worry that a market storm may be brewing, as peaceful periods in the past have frequently led to sharp corrections,” the Journal said. To some analysts, stock prices are “stretched.”
Or take housing. It’s “finally getting healthy,” noted New York Times economic reporter Neil Irwin last week. He cited strong sales of both new and existing homes, plus a pickup of construction. Still, despite the recovery, homebuilding in 2016 remains 36 percent below its 2006 level. Many potential homebuyers have been priced out of the market, the Journal says.
The largest uncertainty is the Federal Reserve. In the 1990s and early 2000s, it seemed all-powerful. A few flicks of its short-term interest rate would keep the economy expanding. Now, the Fed seems a weakling. To speed the recovery, it has kept short-term interest rates low since 2008, with one small upward bump last year; it also bought more than $3 trillion in bonds to reduce long-term interest rates. But the economy refuses to speed up — at least as measured by the GDP.
What’s the Fed to do? Raise interest rates, as the job numbers suggest. Or keep rates down, as the GDP figures imply. Debate rages. Last week, Fed Chair Janet Yellen said that the case for higher rates has “strengthened.”
If you’re not confused, you’re not paying attention. To study the economy’s contradictions is snooze-inducing and inconclusive. No one really understands the gap between the GDP and job figures. But the on-the-ground situation seems less mysterious. We’re near full employment. Consumer confidence is solid, though not spectacular. All this must please Clinton because it takes the edge off economic discontent. Donald Trump’s task becomes harder.
The recovery has been a messy mixture of prudence, fear and relief. People anxiously remember the Great Recession. Hardly anyone is happy with the resulting slow growth. Still, we have landed in a not-so-bad place. We could do worse than achieving more of the same — and perhaps will.
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