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The Economist: Signs of sluggishness

By By Ray Perryman
Aug. 4, 2012 at 3:04 a.m.


During the past few months, a number of measures of national business activity have indicated that the pace of the recovery is slowing.

Recent job gains have been relatively small, retail sales are down, and both businesses and consumers are becoming more pessimistic.

As a result, the risk that the economy could backslide is growing. There are also some positive signals, though good news at the national level is scarce.

According to the U.S. Bureau of Labor Statistics, the monthly change in payroll employment was an increase of only 80,000 jobs in June. For the second quarter of 2012, the total gain was just 225,000 (with additions of 77,000 in May and 68,000 in April).

The unemployment rate remains at 8.2 percent; given calculation methods, this rate likely understates the severity of the jobs situation. This pace of job creation is disappointingly slow, and will do little to decrease the numbers of Americans out of work (the working-age population grows by around 100,000 per month).

A recent survey by the National Association for Business Economics indicates that companies plan to limit hiring in the near future; some 62 percent of businesses indicated they have no plans to change employment.

About half of respondents indicated that sales and profits were largely flat, while 39 percent experienced rising sales. Major factors cited as crimping sales and hiring decisions were the ongoing European financial crisis and the pending threat of the "fiscal cliff" at the end of the year.

Retail sales have also been weak, with June spending down in most categories and an overall loss of .5 percent for the month. This report marked the first time since the fall 2008 that sales were down for three consecutive months. However, one reason for the decrease was lower gas prices, which will work to enhance the economy over time.

In addition, selected industries, such as autos, are still performing far better than at this time last year.

Naturally, the employment situation influences the level of spending, decreasing both the expansion of aggregate income and consumer confidence.

There have been a handful of other less negative signals. Surveys of homebuilders indicate they are feeling more optimistic than at any time in the past five years. Somewhat lower oil prices both encourage growth and dampen prospects for inflation.

The Federal Reserve Bank has also indicated some willingness to pursue further stimulative actions if warranted.

The signs of sluggishness are an outgrowth of major risk factors such as the potential fiscal cliff and ongoing problems in Europe. While the situation in Europe is largely beyond U.S. control (and fortunately appears to be stabilizing at least modestly), the fiscal cliff is a uniquely American problem having more to do with politics than anything else.

With lawmakers focused on the November elections, it will be increasingly difficult to work through meaningful solutions in the immediate future.

However, recent studies of the potential jobs losses highlight the enormity of the fiscal cliff problem.

Without a doubt, there are millions of jobs at stake, and the fallout in terms of gross domestic product could be enough to send the fragile U.S. economy into another recession if it were allowed to persist.

A temporary solution is the most likely outcome. It is in no one's interest to avoid action entirely; the price is simply too high. The better job lawmakers do to come up with real solutions to various problems, the greater the growth potential. At the moment, many of us are taking a "wait and see" approach. Businesses are cautious about hiring, and consumers are afraid to spend, which makes getting the recovery back on track even more difficult.

Dr. M. Ray Perryman is president and chief executive officer of The Perryman Group (perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.

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