July 30, 2012
|Alan Levenson, T. Rowe Price Chief Economist|
In what has become a familiar pattern over the past three years, the U.S. economy seemed to be gaining momentum early in the year only to falter in the spring. In a recent interview, Alan Levenson, T. Rowe Price's chief economist, discusses this worrisome trend and the broader economic outlook.
Levenson emphasizes the fact that the economy is still working through the consequences of the 2008 financial crisis, which is producing both slower growth and greater volatility. Some quarters might post notably higher or lower growth—such as the sharp downturn after the natural disaster in Japan and the subsequent recovery—but the overall growth rate for the last several years remained steady at about 2%.
The employment picture followed a similar path, Levenson points out. Some months show an uptick in employment, while in others, the numbers are disappointing—yet the overall average has held steady. Whatever the exact reasons for the recurring pattern of a spring slowdown, the broader picture is that employment growth has been slow and is likely to remain so, in part due to the weak demand caused by unemployment and a shaky housing market. Firms are unlikely to do significant new hiring, says Levenson, if they are not confident about future demand for their products.
Another factor that is undermining confidence in economic growth is the impact of events abroad on the U.S. economy, most notably the European sovereign debt crisis. Levenson notes that the direct economic impact of a slowdown in the European economy is likely to be relatively small, but events there can hurt U.S. companies through their subsidiaries as well as through the volatility that they introduce into capital markets.
Many are also worried about signs of slowing growth in emerging markets. Levenson believes that this slowdown is another consequence of the bursting of the debt bubble in developed countries, which helped to finance those nations' export-driven economies. As we restructure to become less reliant on debt-driven consumption, emerging markets also need to restructure to focus more on domestic markets. One bright side of this restructuring, Levenson says, is that it is making U.S. manufacturing more competitive and that boost is likely to outweigh any decrease in exports as a result of slowing emerging market growth.
After a dismal jobs report in June, many speculated that the Federal Reserve would redouble its efforts to boost the economy. Yet, as Levenson points out, there is not much more that the Fed can do. Short-term interest rates are already low, and the Fed has already extended Operation Twist, which is intended to drive down long-term rates. The impact of further asset purchases would likely be limited.
Complicating efforts to fix the economy, the federal government is headed toward a so-called fiscal cliff, a series of automatic tax increases and spending cuts that are set to take effect at the end of this year. Fed Chairman Ben Bernanke and others have urged lawmakers to head off these measures, which would likely decrease the gross domestic product (GDP) by 3%, sending the economy back into a recession.
Levenson believes that, if that were to happen, it would be "an unnecessary self-inflicted wound" and suggests that if a more comprehensive agreement can't be reached, policymakers should at least extend the status quo for another six months and reopen the question after the election. More broadly, he calls for an end to short-term policymaking and a turn toward long-term solutions to the country's fiscal problems.
Despite all these challenges, Levenson believes that there are hopeful signs. First of all, the housing market is beginning to stabilize: Even if it's not contributing much to economic growth, it is no longer actively impeding it. Falling prices for commodities, particularly gas, should also help to boost consumer spending power. Meanwhile, household balance sheets continue to improve as consumers pay off debt, corporate balance sheets remain robust, and the financials sector reins in its excesses.
All this progress, Levenson says, provides the U.S. economy with a safeguard against a relapse into recession as well as a base from which it can grow—albeit slowly. If policymakers are able to improve the fiscal situation, the U.S. should, in Levenson's view, have enough momentum "to withstand the shocks that come from overseas."