Retail stores across the country are closing because of falling consumer spending. Prices of goods and commodities are rising faster than incomes. With a weak job growth, Americans — and especially minorities — are having a tough time. Money is tight and credit is hard to come by. The latest government data show overall economic growth eked out a tiny 0.6 percent rate of increase in the first quarter of 2008, the same anemic pace as the final three months of last year. In the second half of the year, higher consumer spending, aided by recent tax rebates, would lift business profit and kick-start the economy, boosting hiring as early as next year. The reverse, however, could be dire, says economist Ken Goldstein at the Conference Board of New York.
The next president likely will inherit the most difficult agenda since the presidency of Franklin D. Roosevelt, with problems that include rising national debt, high inflation, declining job growth, two wars and a failing education system. That’s not encouraging for small businesses. “When asked last year about their economic outlook, a majority of small-business owners responded positively. This year, a whopping seventy-one percent have a negative outlook on the economy. Clearly, small business is feeling the pinch,” says Todd McCracken, president of the National Small Business Association. NSBA’s 2008 survey shows 45 percent of all businessowners expect a recession in the next year, which could doom their survival. Rising cost of health insurance and a lack of capital are also expected to inflict damage on the sector. Sales and profits are down and fewer jobs are being created in 2008 than in any period since the survey began in 1993.
In this year’s TNJ Economic Roundtable, we sought views from four eminent economic experts. They are cautiously optimistic about the next two quarters, but they are also concerned that immediate benefits might not accrue to ordinary Americans unless priority changes are made.
Cheryl Pahaham, Ph.D., acting director, Bureau of Agency Analysis-Office of the New York State Deputy Comptroller.
The views expressed here are Pahaham’s own and do not reflect the position of her employer.
TNJ: Is New York State in a recession?
Pahaham: While there is still disagreement among the experts over whether the United States is in a national recession, analysts for New York State have not declared the state to be in a recession. However, they believe that a recession is likely to happen in the state in the short term. As evidence for the likelihood of recession, we are looking at the following indicators: the state’s dependence on the financial sector for revenue and that sector continues to see write-offs, losses and layoffs; the credit crunch and the mortgage crisis have had impact on various sectors of the state economy, but the extent of that impact is not fully known; slow wage growth in the financial sector has hurt consumer spending; falling retail sales and home values and rising energy prices; job losses in construction and manufacturing that have also limited consumer spending.
TNJ: What’s the outlook for New York State’s economy for the rest of the year?
Pahaham: The impending recession could be mild compared to what the state went through in years past. Looking ahead to the second half of 2008, there could be slower growth in wages and salaries, particularly in the finance and insurance sectors. There is likely to be slower growth in private-sector employment, as the financial sector continues to write down bad debt related to the subprime mortgage crisis.
TNJ: Which sectors are likely to ride out this downturn?
Pahaham: Sectors that are weathering the slump in New York State include education, health care, tourism and social services. Job growth is still projected to occur in these sectors.
Gregory Price, Ph.D., professor
/chair, Economics Department, More-house College, Atlanta.
TNJ: Is the country in a recession?
Price: Technically, we are not in a recession. A recession is official when output, as measured by GDP, falls for two consecutive quarters. So, this is a scientific measurement issue. Notwithstand-ing this, there is evidence of a general slowdown in economic activity as measured by broad production activity across the 12 Federal Reserve districts, as measured in “The [Federal Reserve Bank’s] Beige Book” report.
TNJ: What’s your outlook for the economy for the second half of 2008?
Price: Given rising housing inventories and gasoline prices, I suspect that the second half of 2008 will also be anemic. This could change if gas prices halt their rise and/or generous residential mortgage refinancing for defaultees emerge.
TNJ: Which industries are most affected by the slump?
Price: The transportation sector and those industries that complement it are retracting due to rising fuel prices. Obviously, the residential housing sector is slumping. As home equity is a major component of household wealth, which is used to finance a large array of consumer durables (e.g. appliances, furniture) and luxuries (e.g. vacations, jewelry, clothing), the adverse effects of the housing slump are widespread. Last but not least, the auto sector is slumping due to rising fuel prices.
William Rodgers III, Ph.D., professor/chief economist, Heldrich Center —Rutgers University, N.J.; member, Gov. Jon Corzine’s Commission on Govern-ment Efficiency and Reform.
TNJ: Do you agree with Professor Price that we are not in a recession even if it feels like it to many Americans, and what are indicators to look out for?
Rodgers: The “rule of thumb” definition of at least two consecutive quarters of decline in real gross domestic product indicates we are not in a recession. First-quarter real GDP grew at 0.6 percent, no change from the end of 2007. The recession-dating committee of the National Bureau of Economic Research, which monitors data on sales, real personal income, employment and industrial production, has not designated the start of a recession. The government’s report on first-quarter GDP growth contained several warning signs. The economy expanded because growth in personal consumption of services offset contractions in both durable and nondurable goods, while weakness in dollar value increased exports. National defense expenditures also surged. Meanwhile, signs of trouble were evident in the decline in domestic private investment, as well as in state and local government expenditures.
Going forward, ensuring the slowdown doesn’t turn into a recession will partly depend on a number of issues, including consumer expenditures, which makes up two-thirds of GDP. Other issues to be determined include: How much will Congress’ first stimulus package dampen the adverse impact of the housing crisis and rising oil prices? How much of the rebate checks will go to pay off household debt? When will a second stimulus package, which includes an extension in long-term unemployment insurance, funds for summer jobs, and aid to state and local governments to finance infrastructure projects, be passed? Answers to these questions will determine whether consumer confidence, hence consumer expenditures, continues its slide or rebounds.
TNJ: What are the major characteristics of this slump and do you expect any changes going forward?
Rodgers: The current slowdown is a symptom of a bigger problem: historically, anemic job creation. Since November 2001, average monthly job growth has been just over 90,000, but the labor force has grown by 130,000. More people want to work than the number of jobs being created. Further, even before the current spike in oil prices, inflation-adjusted income barely kept pace with inflation.
Yet I am optimistic about the future, although the following must happen. To help boost the job market, we need a second stimulus package that provides middle-class tax relief, either through additional rebate checks or tax cuts. Additionally, we need a serious re-evaluation of the costs and benefits of our involvement in Iraq. American tax revenue can be utilized more efficiently to stimulate our economy. According to the National Budget Priorities Project, the $156 billion for fiscal year 2008 Iraq Appropriations could provide any of the following: 44 million Americans, or 66 million children, with health care or 25 million college scholarships. Even modest human investments in these areas will have far greater short- and long-run impacts on the economy. If we don’t change our priorities, we will continue to witness growth in income inequality and an increase in the number of families that are struggling to have enough income to live on.
TNJ: Where should we expect to see continued job growth?
Rodgers: If the job market continues to deteriorate into the summer, many analysts will probably date the start of the recession as January 2008. Since then, 207,000 private sector jobs have been lost. The long-term contraction in the manufacturing sector is well known. The subprime fiasco and melting down of the housing market has led to contractions in construction and financial activities, but the erosion in jobs does not stop there. Wholesale and retail trade has lost nearly 73,000 jobs. Professional and business services, the broad industry that contains temporary help services, has shed 55,000 jobs since January 2008. This is important because the job loss indicates that employers are shedding their part-time and contingent workforces.
FINANCE & ECONOMY
Roundtable on the Economy
A difficult agenda ahead for the next president
By George Orwel
The only broad industries that have grown since the start of the year are education services, health services, leisure and hospitality. The growth in health services has been robust since November 2001 and can be attributed to the aging of the population and growth in demand for health services. The public sector has also helped the labor market remain afloat, with the largest growth occurring in local governments, largely hiring by local school districts.
Christian E. Weller, Ph.D., asso-
ciate professor, McCormack Graduate School, University of Massachusetts, Boston; senior fellow, Center for American Progress.
TNJ: What’s your prognosis of the economy and are there policy implications?
Weller: It is unclear if the U.S. economy slid into the recession at the end of the year. There are a few indicators that suggest it did, e.g., the shrinking labor market. But then, there are other indicators that have held up reasonably well, such as economic growth. Importantly, though, we will not know if there has been a recession until we are either well into it or until it is even over. From a policy perspective, there are two questions: First, how can we address the real economic pain that families are feeling, even if it is not formally a recession? Second, how can we make sure that the economy will grow faster after this slump in economic growth?
The answer to the first question requires attention to weak income growth and also to strong price increases, especially in energy and food. Consumer prices rose 0.2 percent in April, down from a 0.3 percent jump for March. The answer to the second question will require more public-policy attention to innovation, renewable energies and fuel efficiency, as well as to a more balanced approach to international trade. If policy measures are working, we should see a recovery of personal income growth, a slowdown in personal debt growth and a rise in economic growth to levels well above 2.5 percent.
TNJ: What’s your outlook for the economy for the second half of 2008?
Weller: The second half of 2008 will likely see a revival of the two-faced economy that was so characteristic of the years from 2001 through 2007. In particular, Wall Street could start to stabilize and possibly grow again, while incomes for families will likely fall as the labor market weakness will continue. As a result, we could see rising income inequality and, possibly, higher financial distress among families with high levels of debt. The indicators to look out for are: the bankruptcy rate, credit-card default rates, and mortgage foreclosures.
TNJ: Which sectors are doing just fine?
Weller: Few industries are not suffering from the widespread weaknesses in the U.S. economy. However, two industries have stood out, in part due to their robust employment growth. They include health care, which is benefiting from continued investments and from also inflation above and beyond overall price increases.
The hospitality industry — especially restaurants — is also holding up reasonably well, although there is no clear indication as to the causes for this robust growth.