November 28, 2020

Economic Memo: A Recovery That Repeats Its Painful Precedents

Earlier this year, as the economy began to sputter, Ben S. Bernanke, the chairman of the Federal Reserve, was asked about the historical evidence that recoveries from financial crises were always painfully slow.

Mr. Bernanke responded that the pattern was clear but the reasons were not. He suggested that a nation that made the right choices could do better. History is not destiny.

It seems increasingly unlikely that the United States will prove his point. The government is expected to report Friday that the economy expanded at a rate below 2 percent in the first half of the year — well below the nation’s long-term average and too slowly to recover the losses sustained during the recession.

Twenty-five million Americans still could not find full-time jobs last month. And hopes for the second half of the year are under the cloud of a political crisis that has cast doubt on the government’s willingness to pay its bills.

Roughly four years since the start of the financial crisis, and two years since the official end of the resulting recession, what has taken hold in their wake is a new kind of great moderation — an era of slow growth.

“The problem is that some persistent and deep currents are restraining our progress,” John C. Williams, president of the Federal Reserve Bank of San Francisco, said on Thursday.

Perhaps the most important is the closely linked combination of housing and consumer spending. It is a longstanding pattern that the Americans recover from recessions by building more homes and filling them with things. But there is no need to build homes while millions sit empty.

The San Francisco Fed estimates that construction may not return to the average level of prebubble activity before 2016, sidelining a major industry.

The decline in housing prices has made people feel and act less wealthy. Broad measures of wealth have bounced back from the depths of the recession, but the gains are driven by the stock market, which means they are concentrated in a relatively small share of families. For the vast midsection of Americans who counted their home as their primary investment, there has been no comparable recovery.

Those without jobs are spending even less. The widely quoted unemployment rate of 9.2 percent is also one of the narrowest measures of the problem. The share of people who cannot find full-time work is almost twice as high. Job growth in May and June was basically flat, although there are some signs of increased hiring in July.

The result: The San Francisco Fed estimates that spending per person per month remains about $175 below its prerecession trend.

“We did a pretty good job of fixing bank balance sheets, but I think that household balance sheets are the ones that have suffered the most,” said Mark Thoma, a professor of economics at the University of Oregon. “We could have done much more to help households.”

The government, another engine of past recoveries, also is dragging on this one. Reductions in government spending reduced the pace of growth in the first quarter by more than one percentage point, and the cuts have continued.

Last week, the Federal Aviation Administration furloughed 4,000 employees and suspended construction projects employing thousands more because much of the agency’s funding had been waylaid by a dispute between the House and Senate.

State and local governments cut workers during the first half of the year almost as fast as private businesses added them. Federal stimulus spending is largely complete. Tax breaks are scheduled to expire in December. And economists say the political battle over federal spending appears to be shaking corporate confidence and delaying hiring and investments. Banks and other corporations are hoarding cash as a reserve against market disruptions. Companies like automakers and mobile home manufacturers, whose customers finance their purchases, are fretting the consequences of an increase in interest rates.

“We’ll only be able to discern the full impact in retrospect,” said Louis Crandall, chief economist at the market research firm Wrightson ICAP. “But there is real reason to worry that this is a distraction.”

Even a temporary disruption in the flow of federal payments could greatly magnify the impact. The forecasting firm Macroeconomic Advisers projects that a one-month standoff will tip the economy back into recession.

And if the government is forced to default on debt payments, Mr. Bernanke has warned of catastrophic consequences for financial markets and the broader economy.

Article source: http://feeds.nytimes.com/click.phdo?i=a875d0c47f17eace2e586d1ee14a82a4

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