An agenda for the Federal Reserve’s review of its monetary policy framework


An agenda for the Federal Reserve’s review of its monetary policy framework



The Turtle Soup Economy

Jazz great Cole Porter once sang, “Is it the real turtle soup or merely the mock?” It’s a relevant question about the state of the current economic recovery as well. By late summer, a double dip recession had become a familiar forecast of U.S. economic prospects. The financial crisis in Europe remained unresolved and threatened to spread. And most data measuring current economic activity turned weaker. Today Europe’s crisis remains unresolved, and the political difficulties that stand in the way of a fix have become even more apparent. But the recent data show a few brighter spots on the economic landscape.

Retail sales, which had stagnated through the spring, rose at a 7 percent annual rate between June and September. New auto sales were part of the story, with domestic brands in September having their best month yet in the recovery. This spurt occurred despite continued declines in surveys of consumer sentiment, showing once again that such measures are not reliable predictors of aggregate consumer spending.

Manufacturing production has been another bright spot. After remaining flat between January and June this year, production rose at a 7 percent rate between June and September. A part of this rise was in production of business capital goods, a category that rises when business grows more optimistic about its own prospects. Business capital goods orders, which presage future production of machinery, equipment and aircraft, surged in July and August. But the surge came in orders for aircraft, many of which are for delivery years in the future. Aside from aircraft, recent orders imply only modest further gains in capital goods production.

Residential construction remains deeply depressed, particularly for single family homes. Housing starts and permits for multi-unit buildings rose this summer from very low levels. And nonresidential construction seems to have bottomed out in the first half of the year.

Slow employment growth has been the most disappointing feature of this recovery. Without faster employment growth, any pickup in consumer demand or in demand for capital goods will not be sustained. And the headline number for employment growth, which is based on firms’ payrolls, averaged only 96,000 per month between June and September. However a separate BLS employment estimate, based on the monthly survey of households, shows a distinct pickup, with gains averaging 230,000 per month in this period. Which one to believe?

From month to month, the household data are highly volatile, which is why they get so little attention when the monthly data are released. But over longer intervals they are as useful as the payroll data in assessing how the economy is growing, which suggests averaging the two into a combined measure. After monthly gains averaging 55,000 over the previous twelve months, this combined measure rose by 163,000 a month between June and September.

All in all, there is evidence the expansion has quickened. But the inference from recent data is highly tentative. And if current prospects are a bit brighter than three months ago, they are still far from bright enough. The double dip now seems unlikely, and this should be good enough for the stock market. But until we see growth above trend for an extended period, this will remain a mock expansion.