By Menachem Wecker
The latest headlines about the U.S. economy can sometimes seem like a ping pong match. One second there is a recession, and the next moment the recession has ended. The next story reveals yet another sign that the recession still lingers. Despite the confusion, there are strong indicators that the economy is recovering, says economist Tara Sinclair, and in this holiday season, sales seem to be weathering the storm.
“The reason for the confusion about the state of the economy is that different data are telling us different things,” says Dr. Sinclair, assistant professor of economics and international affairs and co-director of GW’s forecasting research program.
Economists more or less agree that the recession officially ended last summer, probably in June, says Dr. Sinclair, since the U.S. gross domestic product yielded positive growth in the third quarter of 2009. “We have also seen stronger demand for homes as well as consumer goods and services,” she says. “These are all good signs.”
But unemployment numbers could care less about the official end of the recession. Though they have dropped slightly from a peak of 10.2 to 10 percent, unemployment rates remain very high. Households and small businesses are still finding it hard to get loans, while state budgets are strained and some have been forced to raise taxes and cut jobs, Dr. Sinclair says.
“In summary, we are pulling out of the recession, but there are still a lot of concerns going forward,” she says. “In particular, it looks like we may not see robust job creation for some time, which means it may be a couple of years before we get back to unemployment rates in the 5 percent range we have gotten used to.”
Holiday shoppers do not seem to have cut back much despite high unemployment rates. Retail sales are looking stronger than anticipated and are “surprisingly good” in November, the last month for which there is data, Dr. Sinclair says. “Retail trade sales were 2.2 percent above last year and up 1.4 percent from October 2009. Economists have been revising their forecasts upward for retail sales; they’re not predicting a blockbuster year, but not the dismal Christmas many had expected just a few months ago.”
According to Dr. Sinclair, the recession has affected Washington, D.C., much less than other parts of the country. “People I know appear to be spending about the same amount as in past years, not more,” says Dr. Sinclair. “There’s been no cost-of-living adjustment for gifts or tips. Since inflation has remained, as the Fed describes it, ‘subdued’ this year, it isn’t much of a surprise that there isn’t that adjustment.”
Shoppers are tending to pay for things with cash due to reductions in credit supply from banks and credit demand from households, Dr. Sinclair says. “A lot of people could be using their credit cards, but they’re choosing to use cash to keep their spending under control.”
So what are some of the most important economic indicators to watch in the new year? According to Dr. Sinclair, there are three major issues.
Just to keep up with workers joining the labor force, 100,000 jobs must be created each month. To reintroduce the millions who lost their jobs into the labor force, it might be necessary to create half a million jobs per month. “I think almost all economists would be surprised (but pleased) to see that robust of a recovery,” she says. “We’re just hoping to start seeing positive numbers for monthly job creation.”
Secondly, President Obama recently met with bankers and encouraged them to increase loans. Households and small businesses need better credit access. “As the economy recovers, more people and small businesses will be credit-worthy,” says Dr. Sinclair, and credit access helps the economy by helping businesses hire workers and increase production. “It looks to most economists like there will be less credit available going forward,” she says, “so we may just have to adjust our expectations here, but this will slow the recovery.”
Finally, Dr. Sinclair wonders if inflation lurks on the horizon. “The next concern after all this flurry of policy actions by the federal government and the Federal Reserve is to wonder how it’s all going to get paid for,” she says. “Particularly worrisome is the support in Congress for putting more controls on the Fed. This might actually lead to less independence for the Fed and potentially higher inflation.”