Promoting the Economic Rebound

Promoting the economic rebound

By Lawrence H. Summers, Published: March 25

Lawrence H. Summers, a former economic adviser to President Obama, was Treasury secretary in the Clinton administration.

Economic forecasters divide into two groups: those who cannot know the future but think they can, and those who recognize their inability to know the future. Shifts in the economy are rarely forecast and often not fully recognized until they have been underway for some time. So judgments about the U.S. economy have to be tentative. What can be said is that for the first time in five years a resumption of growth significantly above the economy’s potential now appears to be a substantial possibility. Put differently, after years when the risks to the consensus modest growth forecast were to the downside, they are now very much two-sided.

As winter turned to spring in 2010 and 2011, many observers thought they detected evidence that the economy had decisively turned, only to be disappointed a few months later. A variety of considerations suggest that this time may be different. Employment growth has been running well ahead of population growth. The stock-market level is higher and its expected volatility lower than at any time since the crisis began in 2007, suggesting that the uncertainty hanging over business has declined. Consumers who have been deferring purchases of cars and other durable goods have created pent-up demand. The housing market seems to be stabilizing. For years the rate of family formation has been way below normal, as young people moved in with their parents. At some point they will set out on their own, creating a virtuous circle of a stronger housing market, more family formation and demand, and further improvement in housing conditions. Innovation around mobile information technology, social networking, and newly discovered oil and natural gas is likely, assuming appropriate regulatory policies, to drive significant investment and job creation.

True, salient risks remain of high oil prices, further problems in Europe, and financial fallout from anxiety about future deficits. Unlike in 2010 and 2011, however, it is likely that these risks are already priced into markets and factored into outlooks for consumer and business spending. There has already been a significant escalation in oil prices. The European situation is hardly resolved, but it is unlikely to deteriorate as much in the next months as it did last year. And market participants report great alarm about the deficit situation. So it would not take great news in any of these areas for them to actually contribute to upward revisions in current forecasts.

What are the implications for macroeconomic policy? Such recovery as we are enjoying is less a reflection of the natural resilience of the American economy than of the extraordinary steps that both fiscal and monetary policymakers have taken to offset private-sector deleveraging — a process that is far from complete. A convalescing patient who does not finish the full course of treatment takes a grave risk. So too the most serious risk to recovery over the next several years is no longer financial strains or external shocks but that policy will shift too quickly away from maintaining adequate demand toward a concern with traditional fiscal and monetary prudence.


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NEW YORK | Fri Mar 30, 2012 10:45am EDT
(Reuters) - Consumer confidence rebounded to its highest level in 13 months at the end of March as optimism about jobs and income overcame higher prices at the gasoline pump, according to a survey released on Friday.

The Thomson Reuters/University of Michigan's final March reading for the overall consumer sentiment index rose to 76.2, the highest since February 2011, from 75.3 in February.

The final March figure rose from a preliminary reading of 74.3 and was above economists' median forecasts of 74.7.

"Consumer confidence edged upward as more favorable income and job trends offset rising gas prices," survey director Richard Curtin said in a statement.

Consumer confidence is seen by some economists as a proxy for future consumer spending. Consumer spending accounts for two-thirds of the U.S. economy.

Earlier Friday, the U.S. Commerce Department said personal spending rose by a bigger-than-expected 0.8 percent month over month in February, the largest monthly rise since July.

The University of Michigan surveys' barometer of current economic conditions ended at 86.0 in March, also the highest level since February 2011. This improved on the preliminary reading of 84.2 and February's 83.0. Analysts had predicted a reading of 84.5.

More families, at 34 percent in March, reported a better financial situation than anytime in the previous four years, and more consumers than ever before in the long history of the survey, 38 percent, reported hearing of improved job conditions, Curtin said.

Inflation worries, however, curbed hopes about an improving job market. "Expected increases in inflation held down more optimistic expectations as the majority anticipated declines in their inflation adjusted incomes," Curtin said.

The gauge of consumer expectations was 69.8 at the end of March, above the preliminary reading of 68.0 but below February's 70.3. Analysts had expected no change for the index from the preliminary figure.

An easing of gasoline prices in late March moderated the earlier spike in inflation worries, Curtin said, but he cautioned they could rise further if gasoline prices resume their increase.

"Gas prices of $4 are no longer shocking; if they approached $5, the impact would be widespread and substantial," he said, adding $5 a gallon gasoline could hurt car sales.

The survey's one-year inflation expectation dipped to 3.9 percent from 4.0 percent in early March. It still ended the month at its highest level since last May and up from 3.3 percent in February.

The survey's five-to-10-year inflation outlook held steady at 3.0 percent versus early March. It was up from 2.9 percent in February.