Wednesday, May 21, 2008

Wishing it were true 

The more I look at the data, the more I think my reiteration of a "short and shallow recession" might need revision. I just got around to looking at the St. Cloud data on employment, and we added 0.8% last month (not seasonally adjusted) and 1.4% year-over-year, double the rate for the state as a whole. Some of this has been a resurgence in public sector jobs but private employment has also risen 0.8%. Construction employment looks like it's stabilized, and service sector jobs seem to be marching along smartly.

So I was surprised last night to read Tom Stinson's interview with Lori Sturdevant saying we're in a "fragile position". I guess I shouldn't be, given Tom's usually downbeat manner. Statewide, the private service sector added 1.3% employment last year, but you wouldn't know it from this Q&A:
Q: How would you describe the state's economic outlook?

A: Right now, we're having a short, mild recession. The concern is, will we have a little bit of recovery, then go back down to zero growth? This one, partly because of the [federal] stimulus package, looks like it's going to be a W -- a peak this summer, followed by slow quarters thereafter.

Q: Why the backsliding?

A: It's all the usual things. It's credit, it's housing, it's oil.

We're in kind of a fragile position, if oil prices stay high. Global Insights [the state's national economic consultant] now projects oil prices at $112/barrel in this quarter, and falling to $100/barrel by 2009. [Oil was at $127/barrel on Friday.] Every $10/barrel in oil prices knocks 0.2-0.3 percent off real GDP growth in the U.S. If $120/barrel oil is where we end up, that's going to knock us back to zero in GDP growth later this year.

Every penny per gallon increase in gasoline prices costs consumers about $1 billion. When the stimulus package was passed, gasoline was roughly $3/gallon. Now, it's roughly $3.65. That means higher gas prices have burned up half of the stimulus package.

Q: What's the outlook for housing here?

A: Housing is really important for Minnesota's economy. We haven't, since the Great Depression, gone through a full year when we had housing prices decline nationally. We've just done that, and we're going to do another year of it, and maybe another year after that. We're going to have fewer houses built this year than at any year since World War II. This isn't just your normal slump. This is big time.

Typically, we have a housing slump because the Federal Reserve raises interest rates. Here, the problem is, we built too many houses. Interest rates are low. So how do you work out of this? You're not going to see a big surge, because there is no pent-up demand.

He notes, however, that tax collections are still running $135 million ahead of forecast. (This must be updated from the April report.) Despite this, our state economist is holding to a Global Insights forecast that not only pulls down the 2008 GDP forecast from its February report (1.2% growth versus 1.4% in Feb.) but also 2009 (1.7% vs. 2.2%.) The NABE forecast announced on Monday showed 1.4% growth consensus for 2008 by 2.3% for 2009. Only 56% thought the economy was in recession now, and all of those thought the recession would end either in the second or third quarter. Today's release of the FOMC minutes from 29-30 April indicate the central tendency of projections at the Federal Reserve were in the range of 0.3-1.2% for 2008 and 2.0-2.8% for 2009.

The 'W' recession that Stinson mentions here is very much a minority opinion. My colleague on the Quarterly Business Report has been more optimistic than me, and me more than Tom, and I've never been sure we're in a recession.

UPDATE: Now that I read the minutes of the FOMC meeting, and look at Fed funds futures pointing to higher interest rates before year-end, the less the 'W' makes sense. The minutes contain the note of caution on inflation from FRB Philadelphia president Charles Plosser and Dallas Fed president Richard Fisher:
Rising prices for food, energy, and other commodities; signs of higher inflation expectations; and a negative real federal funds rate raised substantial concerns about the prospects for inflation. Mr. Plosser cited the recent rapid growth of monetary aggregates as additional evidence that the economy had ample liquidity after the aggressive easing of policy to date. Mr. Fisher was concerned that an adverse feedback loop was developing by which lowering the funds rate had been pushing down the exchange value of the dollar, contributing to higher commodity and import prices, cutting real spending by businesses and households, and therefore ultimately impairing economic activity. To help prevent inflation expectations from becoming unhinged, both Messrs. Fisher and Plosser felt the Committee should put additional emphasis on its price stability goal at this point, and they believed that another reduction in the funds rate at this meeting could prove costly over the longer run.
With more recent statements by other Fed officials indicating a pause from here in interest rate cuts, I expect more Fed officials to join Fisher and Plosser through the summer.

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