Monday, December 30, 2013
Economic Indicators Up, Obama's Not
There is reason to look back on the year about to end with some satisfaction – not joy, but satisfaction. The until-now deeply troubled industrial sector last month topped its December 2007 pre-recession peak for the first time, and is over 20 percent above its June 2009 low. Autos led the way: motor vehicle assemblies are running at their highest level since 2005. The industry will produce about 15.6 million cars and light trucks this year, over one million more than in 2012, which was a good year. This sales boom was fuelled by a rise in auto-loan debt carried by consumers, which has pessimists worried that a wave of defaults might be lurking behind the good news, and optimists saying the borrowing proves consumers are more confident and, anyhow, can carry more debt because interest rates are so low.
The housing industry produced equally good news. Total sales of new and existing homes will top five million this year, the highest in five years. Some 430,000 new, single-family homes will be sold, 17 percent more than last year—and last year was a good year. That has builders breaking ground for new homes at the highest rate in five years. The Federal Reserve Board’s decision to keep interest rates low during most of the year kept real estate agents as busy as car salesmen, as frantic buyers chased a dwindling supply of homes in a market in which bidding wars drove up prices. Due in part to the recent rise in interest rates, which are now a full percentage point higher than at the beginning of the year, the market seems to have cooled, but not very much. Pessimists expect the cooling to extend into next year unless rates fall, while the cheerier sort argue that the rate rise reflects the improved economy and jobs market, good rather than bad news for the housing market.
Investors agree with the optimists: the bulls routed the bears in 2013. The three main indices of share prices—the Dow Jones Industrial Average, the broader S&P 500, and the Nasdaq—will likely show gains of 25 percent, 30 percent, and more than 35 percent, respectively, when trading ends this year.
Workers have not done as well as investors this year, but nevertheless are facing an improving labor market. The overall unemployment rate has dropped from 7.8 percent to 7.0 percent, the lowest level in five years, with the rate for workers 25 years and older holding a bachelor’s degree or higher down from 3.9 percent to 3.4 percent. The reserve army of the unemployed—out-of-work men and women actively seeking jobs—has dropped by over one million workers, to 10.9 million, and those unemployed for 27 weeks or longer fell from 4.8 million to 4.1 million. Unfortunately, the decline in unemployment is due in part to a drop in what is called the labor force participation rate, workers becoming so pessimistic about their prospects for finding a job that they opt for the couch and the dole, and therefore are not counted among the unemployed. Still, the number of employed Americans rose to 144.4 million this year, an increase of a bit over one million.
All of the above, and especially the improvement in the labor market, prompted Federal Reserve Board chairman Ben Bernanke to use his final press conference to announce that he and his monetary policy committee have finally decided to “taper”—reduce the program of quantitative easing that has put downward pressure on long-term interest rates. The fact that this announcement did not send the markets and perhaps the economy into the spin that many analysts were predicting can be credited to three rather shrewd moves. First, the taper is modest in amount and subject to review in light of incoming data. Second, it was accompanied with a promise to keep short-term rates low until at least well into 2015, even if the labor market continues to improve, and especially if the inflation rate lingers below 2 percent. Third, Bernanke announced that Janet Yellen, his successor, is fully signed on to this policy, thereby removing uncertainty about monetary policy.
Not to be outdone in providing good news, the political class added to holiday cheer by finally announcing an agreement on a budget deal that pushes future approaches to a fiscal cliff two years down the road. There is still a battle to be waged over the debt ceiling, but Republican congressional leaders have no taste for a showdown with a president who would accuse them of taking the nation into default. The fracture in American political life might not be healed, but it is not as disabling as it was last year. Equally important, especially to latter-day Keynesians, is the easing of fiscal policy that resulted from the budget deal, while those worried that budgetary pressures are reducing our military’s ability to defend the nation found some relief in the additional funds being made available to the Pentagon.
In this improving year one important indicator has sunk like a stone—the popularity of and trust in President Obama. The portion of Americans disapproving the president’s performance has risen from around 42 percent to 54 percent according to an average of several polls calculated by Real Clear Politics. That is the result of the botched introduction of his signature achievement, Obmacare, an emerging awareness that if the introductory “glitches” are cured the fatal flaws in the plan will remain, and of his parsimony with the truth when he promised the 80 percent of Americans who like their insurance plans and their doctors that they could keep both. They can’t. It is now clear that Obama was fully aware of that fact and that support for his health-care revolution from the satisfied 80 percent would evaporate unless he made the false promise. Now, reality bites.
This was also the year in which the Anglo-Saxon competitive, market-based economic model saw off its competition, to the consternation of leftish critics. Both the American and British economies are on the road to recoveries, over-due and not very robust recoveries, but recoveries nevertheless. Meanwhile, China, lumbered with inefficient state-run enterprises, is struggling to avoid a credit crunch, while unemployment rates in the bloated welfare states of the EU remain stuck in double digits. Not models likely to attract emulation.
Next week—what 2014 is likely to look like.