Common Cents

by Joel Naroff

There is a lot of discussion going on about a so-called economic slowdown. Suddenly, everyone is saying that growth during the second half of the year could be quite sluggish. My response is: What you see is what you should have expected to see all along. That is, the economy is doing as well as could be expected given the headwinds it is facing.
The worries about the economy stem from the soft recent data. For the second consecutive month, payrolls fell. But in both June and July, a huge number of Census workers came off the government rolls. That was expected. In contrast, the private sector has added workers for seven consecutive months. Also, the unemployment rate has stabilized. That may be only temporary as the current pace of job gains is not enough to drive unemployment down.
The focus on the labor market is well-founded. This is a slow growth economy because consumer confidence is down. And one thing we know: A distressed household doesn’t rush spend lavishly.
People have good reason to be cautious. They are not seeing a whole lot of economic opportunities out there. For most workers, job security is based on the ability to get another job, not keeping the one they have. That means we need a vibrant labor market so people can walk across the street and get another position. The inability to do that is the biggest reason people are not happy and why they are still watching their wallets even if they did survive the Great Recession.
The uncertainty, though, creates a real conundrum: Businesses need to see demand improving before they commit to hiring more workers. But households will not ramp up spending until they have more job security. That, of course, requires more aggressive hiring. That cycle does not bode well for the economy.
So, do we slip into another recession? I don’t believe so. The economy is growing and what we need is some patience. This is not a recovery that can be rushed by additional government spending or the Federal Reserve suddenly lowering rates sharply. Both have already happened. While those actions kept the economy from crashing and started us on the path to recovery, the Fed has little room to lower rates further, and we cannot afford another massive spending plan.
I believe it is time for the private sector to take over. The withdrawal of most, though not all, spending and monetary policies will come at a cost as the recovery is likely to be slow even, if it is steady. The restraints of banks being cautious with credit and the home construction being limited as few builders can compete with the supply of low-priced foreclosed houses will not disappear soon. The damage will require more time to be repaired.
It was unrealistic to expect a robust recovery. The strong growth we saw at the end of 2009 was driven by the need to rebuild inventories. Going forward, companies will begin using their earnings to hire more, households will start accepting the “new normal” of a slow growth economy and start spending, and the upturn will proceed. Once that positive cycle kicks in, we will start seeing strong growth again, though it may take another six to twelve months to arrive.
Joel L. Naroff, Ph.D, is the President of Naroff Economic Advisors.