Entries for March 2007

Remember how one of James Baker's rationales for the Persian Gulf War, beta version, back in 1991 was "jobs, jobs, jobs"? See, that's pretty much the heart of my amateur rationale for why I think the economy will avoid a recession this year despite all the fears about housing. Jobs, jobs, jobs. Well, to be exact, jobs and income. Consider the following, and see if you agree:

Has Charlie Rangel, the personable chairman of the House Ways and Means Committee, pulled it off? After unveiling "A New Trade Policy for America"–which would attach tougher labor and environmental standards, among other provisions, to U.S. trade agreements–the New York Democrat optimistically stated: "We are on the brink of restoring bipartisanship to American trade policy. The policies we've outlined today should send a clear message that this Congress wants trade, but we want trade that works for all Americans."

The conventional wisdom in Washington, D.C., is that the Bush tax cuts, due to expire in 2010, won't be extended. The recent Democratic budget proposal, for instance, demands that the tax cuts get paid for to the tune of $200 billion a year starting in 2011. Well, maybe the child tax credit and marriage penalty stuff might get saved, but certainly not the marginal rate cuts and the reductions in dividend and capital-gains taxes.

As the saying goes, never try to catch a falling knife. And what made me think of that? This: New single-family home sales declined 3.9 percent in February to an annual rate of 848,000, according to new Commerce Department data. That's the lowest level in almost seven years and much weaker than the 990,000 rate expected by the consensus. Plus, it's the absolute reverse of the 3.9 percent rise in existing home sales. Even worse, sales were revised lower for November, December, and January. Here are four Wall Street takes on the news, none of them particularly cheery:

My favorite site for all things weird, innovative, and creative is Boing Boing and not just because the site is–as it correctly describes itself–"a directory of wonderful things." It's also that it reminds me of how important innovation and creativity are for the future of the U.S. economy. (Yes, that's how my mind works.)

The Dow Jones industrial average is now back within 2.5 percent or so of its all-time high after rallying 3 percent from its 2007 nadir. (The Shanghai Sneeze and all that.) But should the Dow eclipse its old mark, there are some people–other than massive short sellers, of course–who won't be cheering. As they see it, stock market "records" are phony because the various averages and indexes don't take inflation into account. Here is how economist Jason Furman, in an analysis for the Center on Budget and Policy Priorities, dismissed the Dow when it hit a nominal high last October at 12,090:

No surprise, the Federal Reserve left short-term rates unchanged today at 5.25 percent. But in its statement after the meeting, the Fed explicitly expressed way more concern about inflation than economic growth. The Fed's Open Market Committee described price pressures as "somewhat elevated." (In its January comment, by contrast, the FOMC said inflation had "improved modestly.") What's more, the Fed said that its predominant policy concern was inflation rather than growth; the latter it expects "to continue at a moderate pace."

Here are 400 billion reasons President Bush's 2001and 2003 tax cuts may not see the next decade of the 21st century. The five-year federal budget proposed by Senate Democrats last week lets the reductions stay in place after their current 2010 expiration date–if backers can come up with $400 billion to pay for them in 2011 and 2012. Extending them to 2017 would "cost" $1.8 trillion. (This sort of static analysis oddly assumes that taxes–whether higher or lower–have no economic impact.) Now given that the current Congress is having trouble coming up with $40 billion-$50 billion for a temporary fix to the alternative minimum tax, finding a spare $200 billion a year seems like a tall order indeed. "After 2008, the default budget position is going to be higher taxes," concluded Tom Gallagher, a veteran political analyst at International Strategy & Investment Group, in a recent chat.

"What kind of dope are you smoking?" queries a faithful Capital Commerce reader, taking issue with my outlook–as outlined in the recent posting "Subprime Scare Is March Madness"–that problems in the subprime mortgage market will not lead to a recession. Yet I am going to stick to my guns on this one. Let me point to a new study by Christopher Cagan, director of research at First American CoreLogic, a Santa Ana, Calif.-based real-estate information firm. Cagan finds the following:

Tell you one thing, Alan Greenspan is way more fun now that he's no longer helming the Federal Reserve. One day he's telling rapt audiences that a recession is possible–helping roil global financial markets in the process–the next day he's actually giving odds. (About 33 percent, if you're keeping track.)

All the bears on the economy have been telling the rest of us to keep a close eye on jobless claims. If they start rising–probably driven by spillover from the weak housing market, the theory goes–that will be an important sign that the labor market is weakening. And if the labor market is weakening, so eventually will consumer spending. Thus, a recession is nigh. But today's data from the Labor Department show initial jobless claims fell 12,000 to 318,000 for the week ending March 10–down from a peak of 359,000 in early February. That drop provides a nice piece of evidence that the February surge in jobless claims was indeed weather related and not a sign of an increasingly weak job market. As the econ team at Action Economics puts it:

Maybe the troubles in the subprime mortgage market will turn into some sort of nasty financial contagion that will dramatically worsen the broader housing market and nudge the economy into recession. But I have a difficult time seeing that happen as long as jobs and incomes are growing. For starters, the 97,000 jobs added in February isn't such a bad performance, considering the terrible weather that month that also seemed to quash retail sales. And if recent history is any guide, that jobs number will be revised higher.

As I mentioned to CNBC's Maria Bartiromo last weekend on her show, The Wall Street Journal Report, right now the U.S. economy sort of reminds me of the dysfunctional family in the Oscar-nominated film Little Miss Sunshine: It doesn't work perfectly, but it gets the job done in the end. To economists Brian Wesbury and Robert Stein of First Trust Portfolios, today's soft economy reminds them of the slowdown during the 1990s expansion:

The embryonic Rudy Giuliani campaign has gotten a lot of stick from critics who doubt he'll be able to effectively win over Christian conservatives because of his liberal social views. Less has been said about Sen. John McCain's need to win over another important GOP group: economic conservatives. McCain voted against President Bush's 2001 and 2003 tax cuts, though he voted in favor of the 2006 extension of Bush's capital gains and dividend tax cuts. Here's what McCain, who reportedly has been consulting with supply-side guru Arthur Laffer, says about tax cuts on his exploratory committee website:

Recession predictions are all over the map right now. Alan Greenspan thinks there's a one-third probability. Economist David Rosenberg of Merrill Lynch estimates there's a 55 percent chance. Joel Prakken, chairman of Macroeconomic Advisers, thinks there's "well less" than a 50 percent chance–and dropped his rough estimate to around 20 percent after a bit of hectoring by me. (Prakken also expects growth in gross domestic product to "pop back up" in the second half of the year, to at least 3 percent.)