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SINCE Florida’s property market collapsed and its economy tanked, Hillsborough County has endured almost nonstop austerity. In the past five years the government of the county, halfway up the state’s Gulf coast, has eliminated a quarter of its 6,000 positions through attrition and lay-offs. It has scaled back after-school child care. Workers’ pay has been frozen for three years.
But the fiscal year that begins in October holds the prospect of relief. Property-tax revenue is declining more slowly. Tourism-related taxes have stabilised. Sales-tax revenue is actually up. There is still a deficit to be eliminated, but it is a third of the size it was a year ago; the county thinks it will need no lay-offs next year. Things aren’t getting better, says Tom Fesler, the county’s budget director. “It’s more a function of just not getting worse.”Such faint praise is not as damning as it seems; there has been an awful lot of worse in the past few years. America’s recovery may have officially begun in mid-2009, but it has bogged down repeatedly since. That has in part been due to circumstances beyond American control, such as rising oil prices and Europe’s debt crisis. But it has also been due to the hangover of the recession: consumers have been shedding debt, lenders have been reluctant, housing markets have been moribund, and state and local governments like Mr Fesler’s have been cutting budgets in the face of prohibitions on deficits.
Some of those impediments have now gone away. Economic and financial indicators released in the past few weeks portray a surprisingly chipper economy. In the three months to the end of February employers added 734,000 jobs, which is the best result since April 2006 if you exclude from past figures workers hired temporarily for the federal census. The unemployment rate has fallen by 0.7 percentage points since September, to 8.3%. And this is not just a matter of discouraged workers giving up the hunt for work. A broader measure of unemployment that includes discouraged and underused workers has fallen even further (see chart).
The Federal Reserve has been toying for months with plans for a new round of “quantitative easing”—the purchase of bonds with newly created money—as a way of stimulating demand. But at its meeting on March 13th it decided it didn’t need the plans yet, and upgraded its outlook for the economy, which in January had been merely “modest”, to “moderate”. That same day the stockmarket jumped to its highest since May 2008. It was helped both by good news on retail sales and by another announcement from the Fed: most major banks passed the stress tests that it had administered (see article).
All things in moderationVoters seem similarly uplifted. Polls show approval for Barack Obama’s handling of the economy growing steadily from August to February before slipping a little, probably on the basis of high petrol prices. In part as a result, he leads all the Republican candidates in most hypothetical match-ups, although that means little eight months before an election.
This is hardly the unshackling of a Titan. As befits a recovery characterised by such fine gradations as the distinction between modest and moderate, there are a lot of caveats. For one, gross domestic product (GDP) does not look nearly as healthy as the jobs data imply. The drop in unemployment since August is on a scale that would normally be expected only if annualised growth were up to 5%, according to Ben Herzon of Macroeconomic Advisers, a consultancy. In fact GDP grew by only 3% (annualised) in the fourth quarter. It is tracking 1-2% in the current quarter. Most economists still expect growth this year of only about 2-2.5%. That is roughly the rate needed to keep unemployment stable; it is not enough to reduce it further.
Despite not matching the GDP figures, the recent employment numbers may nevertheless be accurate. It may be that firms simply can’t squeeze more productivity from their workforce and are hiring to meet additional sales. Or it may be that the GDP figures are wrong. Subsequent revisions may show that GDP has been understated in the recovery rather as it was overstated during the recession.
A more pessimistic explanation is that the mild winter has temporarily boosted employment in construction and other weather-sensitive industries, allowing projects to keep going but not encouraging new ones to start. Goldman Sachs reckons this may explain 100,000 jobs. Another possibility, according to J.P. Morgan, is that the size and timing of the 2007-09 recession threw off the process for ironing out seasonal fluctuations in the data. Either explanation implies some of the current strength will be reversed later this year.
Even if the unemployment improvement is for real, there’s still the problem of circumstances beyond America’s control. Last year’s green shoots wilted when the loss of Libyan oil production caused prices to spike; Japan’s earthquake and tsunami disrupted supply chains; and Europe’s sovereign-debt crisis worsened for the second year in a row. Though as yet this year has seen no large natural disasters, much of Europe is in recession, and the price of oil has risen to $126 a barrel as a result of disruptions to supply, strengthening global demand and the showdown with Iran.
Neither factor helps, but the impact does not as yet seem too bad. Europe’s recession is proving to be shallower than expected. The rise in oil prices, which matters more to the American economy than their level, has been smaller than last year—when they were 33% higher than the year before. That is equivalent to prices going up to $145 this year, which is unlikely unless tensions with Iran get much worse.
The slow grow
But if adverse events elsewhere explain why GDP grew by only 1.7% last year, they cannot explain why growth has averaged a mere 2.5% since mid-2009. For that, blame the drag that any economy in the aftermath of a financial crisis must suffer: households and businesses are paying down, or defaulting on, old loans, rather than taking out new ones to invest and spend; banks are reluctant to lend because of depressed collateral values or regulatory scrutiny. Monetary and fiscal stimulus can cushion the worst of these impacts, but eventually conventional monetary policy reaches its limits and fiscal stimulus turns, sometimes prematurely, to austerity. Underlying this is the reallocation of capital and labour from sectors that grew too fat in the boom years.
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