Bizarre Jobs Report Aside, There’s Still Momentum for the Economy in 2014

Early signals show that this time isn’t another false start.

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National Journal
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Catherine Hollander
Jan. 10, 2014, midnight

This time, it’s for real. Eco­nom­ists say 2014 could bring the comeback we’ve all been wait­ing for.

They also said this in 2013. And 2012. And 2011. Those times, bullish sen­ti­ment suc­cumbed to ag­grav­ated dis­ap­point­ment and a con­ces­sion that, yes, the dis­mal sci­ent­ists were wrong again. Now, though, some evid­ence ac­tu­ally backs them up, start­ing with across-the-board strength­en­ing in the data and a bet­ter-than-be­fore po­ten­tial for Con­gress to avoid fisc­al shenanigans for an en­tire year. An en­tire year!

Signs of a turn­around star­ted to ap­pear at the end of 2013. The Novem­ber jobs re­port was sol­id and stronger than ex­pec­ted — un­em­ploy­ment dropped to 7 per­cent, down from a crisis peak of 10 per­cent, and payrolls swelled by 203,000. Then came GDP, which pegged third-quarter growth at a sur­pris­ingly re­spect­able 4.1 per­cent. It was far bet­ter than the 2.5 per­cent growth in gross do­mest­ic product that the eco­nomy re­cor­ded in the second quarter. The Fed­er­al Re­serve Board felt so good about the in­com­ing data that it told Wall Street the cent­ral bank would be­gin tak­ing its foot off the gas, eas­ing back on stim­u­lus meas­ures.

A word, be­fore we pro­ceed, about the Decem­ber jobs re­port, which the Bur­eau of Labor Stat­ist­ics re­leased Fri­day morn­ing: It’s a head-scratch­er. On one hand, the un­em­ploy­ment rate dropped to 6.7 per­cent, the low­est level since Oc­to­ber 2008. On the oth­er, payroll growth — for which there is a mar­gin of er­ror of plus-or-minus 100,000 — was much lower than ex­pec­ted, the eco­nomy adding just 74,000 jobs, com­pared with fore­casts of roughly 200,000. More people left the labor force, and that’s part of the reas­on the un­em­ploy­ment rate, which is meas­ured based on people look­ing for work, de­clined. But the pre­vi­ous two months’ payroll num­bers were re­vised up by 38,000. The re­port was not a heart­en­ing way to start 2014, but it’s not quite clear yet what it means. Paul Ash­worth, chief U.S. eco­nom­ist at Cap­it­al Eco­nom­ics, wrote in an emailed note to cli­ents that the payroll miss was prob­ably largely due to “un­season­ably severe winter weath­er” last month. Joe La­Vor­gna, the chief U.S. eco­nom­ist at Deutsche Bank, called the news “bizarre.”

“It is such a in­con­sist­ent re­port in the sense that you’ve got the drop in the un­em­ploy­ment rate along with a weak­er em­ploy­ment num­ber,” he said. “The two al­most off­set each oth­er.”

And des­pite one bad re­port, the fisc­al news from Decem­ber was good and of­fers hope for the rest of the year. Law­makers passed a two-year budget deal, small though it was, that marked a sig­ni­fic­ant de­par­ture from the let’s-make-de­cisions-only-after-freak­ing-every­one-out ap­proach Con­gress has de­ployed re­lent­lessly since the debt-ceil­ing de­bacle of 2011. Then, the brink­man­ship drove mar­kets and con­fid­ence off a cliff and stripped Amer­ica of its gold-plated cred­it rat­ing. In 2013, the fisc­al cliff and se­quester did enough dam­age to slice 1.5 per­cent­age points off GDP growth, and the Oc­to­ber gov­ern­ment shut­down may have knocked half a per­cent­age point from the fourth-quarter’s growth. (Those ini­tially bullish eco­nom­ists blamed all of this stuff for their er­ro­neous re­cov­ery pre­dic­tions.)

In 2014, however, eco­nom­ists are cal­cu­lat­ing that sta­bil­ity in the data and a cam­paign-fo­cused, risk-averse Con­gress will yield the sus­tained re­cov­ery the coun­try’s been so-far denied. “That ini­tial phase after [the] fin­an­cial crisis is re­par­a­tion, and then we can start re­cov­ery,” says Mor­gan Stan­ley eco­nom­ist El­len Zent­ner. “I think that five years after the fin­an­cial crisis, that’s where we are” — start­ing a “real” re­cov­ery.

Of course, all pos­it­ive eco­nom­ic vibes come with caveats about un­fore­seen cir­cum­stances such as European sov­er­eign-debt crises, Ar­ab Springs, and tsuna­mis. And don’t for­get about the debt ceil­ing, which law­makers will have to grapple with even­tu­ally in 2014.

But the real po­ten­tial for bad news lies in what we already know: Des­pite slow im­prove­ment in the eco­nomy and a pos­sib­il­ity the re­cov­ery will pro­ceed at a faster clip in the next 12 months, the na­tion has a long way to go be­fore things are nor­mal again, par­tic­u­larly for the long-term un­em­ployed and oth­ers. Labor-force par­ti­cip­a­tion rates have con­tin­ued their de­cline in re­cent months, as well.

The be­lief in the real­ity of re­cov­ery doesn’t just mat­ter as a thought ex­er­cise. “If people don’t feel very good about their fu­ture fin­ances, they tend not to spend,” Zent­ner says. “Con­sumer spend­ing has been sub­par, and that’s why the en­tire re­cov­ery has been sub­par.” Meas­ures of con­sumer sen­ti­ment were up in Decem­ber — a good sign, but one that will need to be main­tained.

How poli­cy­makers un­der­stand and talk about the re­cov­ery, then, mat­ters. (See Jim Ol­iphant on “Why Obama Is Afraid to Tout the Eco­nomy”.) De­scrib­ing it as real and strength­en­ing could in­spire con­fid­ence in con­sumers, an un­deni­ably good thing. But it could also re­move the im­petus for tak­ing fur­ther ac­tions to shore up the re­cov­ery or help those af­fected by the fin­an­cial crisis. Chad Stone, the chief eco­nom­ist at the Cen­ter on Budget and Policy Pri­or­it­ies, wor­ries that a bet­ter-than-ex­pec­ted 2014 — while a good thing — might take pres­sure off eco­nom­ic poli­cy­makers, who he be­lieves can do more to help work­ers get back on their feet by ex­tend­ing fed­er­al job­less be­ne­fits.

“We can be com­pla­cent about the dir­ec­tion the eco­nomy is go­ing if growth picks up and em­ploy­ment picks up in 2014, but we have to, as I guess the Brit­ish say, ‘mind the gap’ — that there still is this gap between what we would be cap­able of pro­du­cing with stronger de­mand,” Stone says.

Hopes are already high for this month’s eco­nom­ic re­ports: Early signs point to GDP bust­ing past ex­pect­a­tions again for the fourth quarter. That, plus the jobs re­ports, will of­fer an early read on wheth­er eco­nom­ists are right this time around or wheth­er 2014 proves to be just an­oth­er year of missed ex­pect­a­tions. Ini­tial sig­nals are point­ing to the former, and that’s good news for every­one.

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