So far this year the economy has been on quite the roller coaster ride. After a slow start, the job market heated up and by April, conditions were looking a lot better. But then gasoline prices surged and consumers began pumping extra spending money into their gas tanks. Add to that the continued weakness in housing, limited credit availability, the financial crises in Europe and the debt-ceiling debate in Washington and it should surprise no one that consumer spending faded and business leaders assumed a wait-and-see attitude.
The spring economic soft-spot was created by the jump in gasoline prices to $4.00 per gallon. That triggered a cutback in households’ purchases for things other than fuel. Retail sales slowed sharply, led by easing motor vehicle sales in both May and June. Purchases of other big-ticket items such as furniture and electronics were off as well. People had become uncertain about the future and without money to spend, they simply withdrew from the consumption field of battle.
The cutback in spending had a cascading impact. Critically, job creation largely disappeared. Businesses had added over 800,000 new positions over the first four months of the year. But in May and June only 130,000 additional jobs came on line. Worse, the unemployment rate climbed for three consecutive months, hitting 9.2%, the highest rate in six months.
So, is the economy crashing or was the spring fall-off only a passing thing? There are hints that the economy may be turning back up. Consumer-related companies – including retailers, hotels and restaurants – all increased their payrolls in June. There were also solid chain store sales in June – and with gasoline prices having fallen about forty cents from the peak, consumption should improve this summer.
The positive news on the business side was created by manufacturers of machinery, equipment, computers, semiconductors and transportation all ramping up hiring. When you see jobs being added in these industries and orders growing, it’s hard to argue that the economy is faltering. The headline job numbers, which are lagging indicators, may be overstating the problems. Indeed, with housing starts up sharply in June, we could see much better job gains in the months ahead.
When it comes to economic policy, where we are often drives thinking. The slowdown has raised major issues for monetary and fiscal policy. The Fed is still uncertain about where things are going, so the members will not be looking to raise rates for a long time. But then there is Washington, where facts almost never get in the way of a good political sound bite. Though budget cuts are needed, they negatively affect the economy in the short run. Government belt tightening led to over 650,000 public sector positions being lost in the past year alone. There is no such thing as a free budget cut, and the negative impacts must be taken into account when the timing of spending reductions is considered. Don’t be surprised if any agreement assumes a smaller government in the future rather than the near term, which would make sense.
While the economy has been moving forward at a snail’s pace, conditions are changing. Rising housing starts and lower gasoline prices should help. But we need gasoline costs to fall a lot more to improve both household and business confidence. The economy should pick up as we move through the summer, but the expansion is likely to remain slower than hoped for.