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2014-12-02 11:34:49
Dec 2nd 2014, 10:09 by R.A. | LONDON
TIM DUY, one of the best writers on macro policy issues, is optimistic about America's economy and wonders why more people aren't:
Overall, I find the pessimism (from the right and the left) inconsistent with the fact that despite the ups and downs of the quarterly data, throughout the recovery, GDP has grown at a fairly consistent rate...
The US economy is far more resilient than it is given credit for. None of the downside risks of recent years have been sufficient to derail the recovery, nor will the supposed downside risks of next year...
[M]y probability of recession in the next twelve months: 0%. I would place similar odds on the following twelve months as well...
Perhaps, just perhaps, the US economic expansion has been consistently undersold, and continues to be undersold. It is worth considering that maybe it is time to just accept the good news without the desperate search for every dark cloud.
Have we all been too pessimistic about the American economy? What attitude should we have?
One metric might be a cross-country comparison. On that score one might suppose optimism is clearly warranted. America's recovery is the envy of the rich world. On the other hand, that is not saying much. Being the best of the bunch when the bunch has done so miserably is not exactly reason for cheer. And while America is far more insulated from global ups and downs than other economies it is not immune. Poor enough performance abroad would indeed slow American growth, particularly if that poor performance were linked to a major financial meltdown. On a cross-country basis one can make a case for optimism, but it's not a strong one.
An historical comparison, by contrast, leads to a much bleaker assessment of the current recovery. The employment recovery since June of 2009 is the worst of any American rebound in the postwar period, and the GDP recovery is the second worst, outdone only by the performance after the 2001 recession. America remains well below the levels of output and employment one might reasonably have expected it to attain both before the Great Recession and in its immediate aftermath. It is true that growth in GDP and employment has been surprisingly even shockingly steady and resilient. But that makes it all the more remarkable that America has made up so little of the ground lost since 2007.
That brings us to another case for pessimism: the limited nature of the recovery. GDP is growing, but you can't eat GDP. You can't even eat employment. Incomes you can eat, if you spend them. Real GDP per capita is only a shade above its level of seven years ago: $50,675 now to $49,455 in the third quarter of 2007. At the median the performance has been much worse; real median household income tumbled from 2007 and has barely recovered.
Still, one might argue that the case for optimism or pessimism rests on what lies ahead rather than what came before. And I reckon that if Mr Duy's optimism leads him to give a 0% chance of American recession over the next 24 months, then pessimism is unquestionably the more appropriate position.
I think it is more likely than not that America will avoid recession over the next two years, but you wouldn't have to give me particularly favourable odds to get me to bet on a downturn. Certainly the odds of one are higher than 0%. A euro zone break-up would send America into recession and the odds on that are positive if perhaps not especially high.
America is still in a world in which interest rates are effectively zero. It will be in that world for at least another six months and probably quite a bit longer. Futures markets reckon we will be well into 2016 before rates reach even 1%. For most of the next two years, in other words, the monetary response to any negative shock, domestic or abroad, will come entirely in the form of unconventional policy. That makes me extremely nervous, as the Fed is obviously uncomfortable about relying so heavily on unconventional tools. Any delay or under-response to a shock due to this discomfort makes a recession much more likely. And I would note that over time and across countries tightening cycles off of zero lower bound episodes tend to be much more abbreviated than what we would normally expect. A half point rise would represent the opening act of a tightening cycle in most cases. Coming off of the ZLB, however, it may well represent the beginning, middle and end.
Another observation: the average postwar expansion has lasted 58 months. The current expansion has already stuck around for 66 months, making it the sixth longest since the records begin, in the 1850s. In two years the recovery will be 90 months old, making it the fourth longest (and within two months of third place). As I said, if asked to bet straight up whether the recovery would rise that high on the list, I would put my money on yes. But I would not put very much money on yes.
And that, actually, is part of the problem. The Fed wants us all to put our money on yes, and a lot of it. Sentiment is an important economic variable; if you want people to buy things and invest, rather than grasp fearfully to their incomes, then you need them to be confident: indeed, optimistic. Optimism is self-fulfilling. But it is not detached from reality. Given past performance and the current state of the American and global economy, I don't find it remotely surprising that people are glum. That is an indictment of the Fed, whose job it is to coordinate our expectations so that we all anticipate, and therefore cause to occur, maximum employment and an average inflation rate of 2%. Maybe this responsibility is beginning to dawn on the Fed; as Mr Duy notes it downplayed some recent market havoc in its latest statement so as not to reinforce public pessimism. On the other hand, it shows little interest in taking positive action to raise people's expectations.
Being down so long things look like up is not optimism. America should be performing better, and I find it disappointing that it hasn't and that the Fed doesn't seem particularly interested in working to improve matters. And so I'm pessimistic. I will turn optimistic when the Fed convinces me such a turn is warranted.