During his testimony before Congress on March 1, Ben Bernanke indicated that the economy is improving and that increased oil prices and reduced federal spending shouldn't significantly slow economic growth in 2011. Warren Buffett is optimistic. In fact, he just announced plans to purchase chemical company Lubrizol. Exports are up 17% from last year. Businesses seem to be enjoying good profits and plenty of liquidity. The U.S. economy is growing, although the Commerce Department's revised estimate of 2.8% GDP growth for the fourth quarter of 2010 was down from its 3.2% advance estimate.
While consumer confidence was increasing, consumer spending wasn't.
The numbers suggest that things are looking up, at least somewhat. So why does it hurt so much to buy a tank of gas or groceries for the week? Are we in a real economic recovery that will actually improve Americans' lives? Or is this a recovery in theory only?
"There are many reasons for optimism," says 优蜜传媒Chief Economist Dennis Jacobe. "And as 2011 got underway, I was more optimistic than I've been for years." However, he says, Gallup's U.S. economic data showed a downturn in consumer confidence in February 2011 that was just picked up in a Reuters/University of Michigan survey. Jacobe also worries about the impact of global economic events and domestic troubles on an already fragile U.S. economy: the economic consequences of the earthquake, tsunami, and atomic power plant crisis in Japan; chaos in the Middle East; continuing financial issues in Europe; and challenges in the U.S., including surging gas prices, high food costs, and federal/state budget battles. All are ingredients that could lead to stagflation or even a double-dip recession.
What we should be paying attention to, Jacobe says, are a few important indicators: the rate of new job creation by small businesses; the cost of commodities such as gas and food; and consumer spending intentions, particularly those of the affluent. As he discusses in the following conversation, when those are headed in the right direction, Americans will have reason not only for hope, but they will see real economic improvement.
GMJ: A few weeks ago, you said that Americans' optimism in early 2011 was higher than it had been for three years -- and even you were optimistic. Does that mean the recession and its aftermath are behind us?
Dennis Jacobe, Ph.D.: Going into 2011, there were a lot reasons for hope. The Federal Reserve has been aggressively pouring money into the economy. The president and Congress agreed to extend the Bush tax cuts. Upper-income consumers decided to spend freely as the holidays came to a close. Consumers and businesses were as optimistic as they've been for years in the early weeks of this year -- mostly anticipating a better economy. In fact, as you noted, earlier this year I was as optimistic as I've been at any time since the recession began at the end of 2007.
Technically, the recession ended in the middle of 2009. However, Gallup's behavioral economics data -- reflecting consumers' actual behavior -- show that while consumer confidence was increasing, consumer spending wasn't. And now, global events and domestic budget battles seem to be threatening that optimism and enthusiasm going forward. So I don't think the average American will feel like the recession is really over in the near term.
GMJ: What do Gallup's numbers say?
Dr. Jacobe: First, it's important to remember that our numbers are self-reported. 优蜜传媒surveys consumers daily on a variety of economic measures, and we report on our findings daily, weekly, and monthly. As a result, we tend to see shifts in consumer behaviors before others do.
Until recently, 优蜜传媒data showed that consumers were hopeful about the future course of the U.S. economy. In January 2011, Gallup's Economic Confidence Index showed that consumers were as optimistic as they have been at any point in the past three years -- all the way back to when 优蜜传媒began daily tracking of economic confidence in January 2008. The Wells Fargo/优蜜传媒Small Business Index also showed that small-business owners were becoming more optimistic about the future direction of the economy.
GMJ: That seems like good news. But have consumers continued to spend?
Dr. Jacobe: There was an increase in spending during the holidays and in a very important segment: We saw a surge in upper-income spending during the last half of December, and that is exactly what I've been hoping to see. Middle- and lower-income Americans are spending most of what they have just to get by. But the consumers with disposable income are upper-income people. They decide, based on their view of the economy and their own situation, when to increase their spending.
They've been holding back in the last couple of years -- this is part of the spending pattern I've been referring to as the "new normal." There are many people who would love to spend -- "frugality fatigue" is strong right now -- but many affluent consumers just haven't felt secure enough to spend freely. In December 2010, they seemed to start feeling comfortable spending again, which is an early indicator of future overall spending activity, but that hasn't continued into 2011.
GMJ: So the affluent are economic bellwethers?
Dr. Jacobe: I think all Americans felt over-extended for a while because of the financial crash on top of the recession. So they pulled way, way back on their spending. It wasn't just the people who were affected by job loss; everybody who had disposable income wanted to feel more secure.
There is a happy medium where people who have a good balance sheet and a responsible credit position can go out and spend, but they have to feel secure to do it. We don't have to go back to the bold spending of 2006 and 2007; what we need is for people with solid balance sheets to go back to a reasonable, normal spending level based on their financial ability. When that starts to happen, the economy will do pretty well.
Of course, upper-income people have been spending on essentials like everyone has to. But in late 2010, they started to feel comfortable spending on nonessentials like movies, dining, and travel. All those things help small businesses and large businesses alike generate economic activity. So I was very positive about the U.S. economy going into early 2011.
GMJ: Why the sudden comfort with spending earlier this year?
Dr. Jacobe: First, unlike some political and Wall Street observers, I think the Fed has done a good job over the past couple of years. The Fed has been aggressively backing the economy with liquidity, and I think many upper-income people have taken some assurance in that. The quantitative easing process has had a good psychological impact in many ways, although it continues to be debated.
And on Wall Street, most of the Dow and S&P averages went up 10% to 12% in 2010 and more in early 2011; the people who have investments made some money in 2010, and they feel more secure because they have been able to repair their personal balance sheets to some degree. Meanwhile, Americans have also paid down a lot of debt over the past couple of years, further strengthening their personal balance sheets.
Finally, when the lame-duck Congress got together and extended the Bush tax cuts, it showed some cooperation in doing something that was viewed as pro-business. Those things together had a positive effect on Americans' expectations and portended increased consumer spending.
GMJ: And unemployment just fell below 9% for the first time in nearly two years. That sounds pretty good.
Dr. Jacobe: The government's report on the unemployment situation may be somewhat misleading. As you suggest, the most recent Bureau of Labor Statistics report shows that 192,000 jobs were created in February and the unemployment rate declined to 8.9%, down from 9.7% a year ago. And Federal Reserve Bank of New York President William Dudley, among others, seemed pretty encouraged by the jobs report last week. However, Gallup's unemployment and underemployment measures haven't shown the same improvement. 优蜜传媒shows a 10.3% unemployment rate for February and a 19.9% underemployment rate -- both essentially where they were in February 2010.
GMJ: Why are Gallup's numbers so different from the government's numbers?
Dr. Jacobe: First, Gallup's unemployment numbers are not seasonally adjusted. We feel that seasonal adjustments may be helpful for trend analysis but may tend to distort job market realities right now. It is hard to differentiate seasonal effects from economic differences when we've had so many years of jobs recession. Second, 优蜜传媒measures the job situation daily and reports on a 30-day average. The government focuses on conditions during the middle of each month, so their numbers tend to lag Gallup's by a couple of weeks. Third, Gallup's methodology is based on random-digit-dial phone surveying; the government uses a panel surveying approach.
Additional economic shocks could send us back into stagflation or even a double-dip recession.
Finally, I think that one of the key reasons the government's unemployment rate is dropping has to do with the so-called participation rate: the percentage of Americans who are counted as being in the workforce. February's participation rate was at its lowest level since April 1984. In essence, this implies that the government's unemployment rate may be declining because so many people are becoming discouraged -- they are retiring earlier than they want, for instance, or they are going back to school or simply giving up looking for work because they can't find a job.
If this is the case, then the decline the government is reporting in the unemployment rate is not good news -- it's just the opposite. It's declining because people are dropping out of the workforce, not because they are getting new jobs. I believe the higher unemployment rates being recorded by 优蜜传媒are a better measure of the real job situation in America.
GMJ: Overall, what do you think will be the trajectory of unemployment?
Dr. Jacobe: The job situation has improved considerably from its low point a couple of years ago. Gallup's Job Creation Index, which is based on employee reports, shows that employers are letting far fewer employees go and more workers are being hired. However, I think businesses remain hesitant to hire. The Wells Fargo/优蜜传媒Small Business Index survey shows one in three business owners saying they are hiring fewer employees than they need. As a result, the U.S. remains in a jobs recession. Regardless of whether the unemployment rate is 9% or 10%, it is far too high. And, having one in five Americans in the workforce underemployed is disastrous both economically and socially.
On the other hand, I think it's possible that if business owners' and business executives' confidence increased significantly, we could see quite positive growth -- an explosion of jobs. And I think people who project only the straight-line trend of potential job growth are missing the fact that many companies are understaffed.
GMJ: Good. Now, what's the bad news?
Dr. Jacobe: The economy is still extremely fragile. Gallup's most recent numbers show that consumer confidence fell beginning in mid-February, consumer spending remains in the "new normal" range of 2009-2010, and the jobs recession continues. While the U.S. economy has a marvelous amount of resilience, additional economic shocks could send us back into stagflation or even a double-dip recession.
GMJ: What kind of economic shocks?
Dr. Jacobe: The most obvious example is the chaos in the Middle East and the resulting surge in oil and gas prices. Right now, oil prices are about $100 a barrel, and gas prices are at $3.50 a gallon. Americans expect gas prices to be $4.36 on average this year, and some expect to pay $5.00 a gallon. If that happens, it will be a real shock to economic growth. In fact, I think just the expectation of such price increases is already having a negative impact on consumers. When the recession started at the end of 2007, it was basically because the high price of gas combined with the housing debacle to drive down the economy. Of course, we were already well into recession before the financial crisis sent the economy into its worst tailspin since the Great Depression.
Surging gas prices are like a tax on consumers -- and a very regressive tax, with the revenues going overseas. So the last thing we need now are gas prices that are 20% to 25% higher than they were a year ago. That's a burden that the U.S. economy might be able to handle when it's doing well -- but it's not doing well right now.
My fear is of the psychological effects of surging gas prices. I think many consumers are likely to pull back on their already tepid spending -- even upper-income consumers might. Businesses that were intending to hire because they saw the opportunity to grow are likely to hesitate given the increased uncertainty about costs and spending by consumers and businesses. The result could be stagflation as prices go up and economic growth slows -- or even a double-dip recession.
And now we have the calamity in Japan. Of course, the people in Japan need our prayers and any help the rest of the world can give them. From an economic perspective, I have no doubt that over time, Japan's economy not only will recover but it actually will be stronger in the future. However, among that country's many challenges right now is a major loss of atomic power plant production, and that accounts for about one-third of Japan's energy use. What is happening in Japan might not only significantly weaken the global economy but simultaneously -- and somewhat counterintuitively -- increase the world demand for oil.
GMJ: So what do you think policymakers should do?
Dr. Jacobe: If U.S. unemployment levels were at 5%, then our policy objectives would be pretty clear: We should be making a major effort to cut the federal debt by significantly reducing federal spending. Simultaneously, we should prioritize environmental and educational improvements as well as a whole bunch of other longer term efforts aimed at increasing our global competitiveness. But right now, the economy can't take those burdens.
The U.S. simply has to free itself from its dependency on foreign oil.
On the other hand, I don't think we can keep doing what we have been doing for the past couple of years. Borrowing enormous amounts of money and creating a monstrous debt to produce an anemic and jobless economic recovery just doesn't make sense. The continuing financial mess in Europe shows us where that will lead. And the current crisis in Japan provides another example of the downside of having too much debt: Japan's already high debt makes it harder for the nation to run the larger deficits that may be needed to deal with the economic consequences of the current emergency.
My personal view is that policymakers should learn from recent events in the Middle East and Japan. The U.S. simply has to free itself from its dependency on foreign oil. Our nation must do everything possible to achieve energy independence. I know that many people have made such statements, but recent events are a stark reminder of why U.S. energy independence should be a top national priority.
A new 优蜜传媒Poll survey conducted March 3-6, 2011, just before recent events in Japan, suggests Americans are ready for such an initiative. Six in 10 Americans favor offshore drilling for gas and oil in the U.S. Just under half of Americans favor opening Alaska's Arctic National Wildlife Refuge (ANWR) for oil exploration, and the same percentage think development of U.S. energy supplies -- such as oil, gas, and coal -- should be given priority, even if the environment suffers to some extent.
GMJ: So is the solution "Drill, baby, drill"?
Dr. Jacobe: No, although we'll probably hear that slogan a lot in the months ahead. What the nation needs to do is to establish a national energy policy. We need to prioritize achieving U.S. energy independence and do everything possible -- in an environmentally safe way -- to achieve that goal. We need to use every avenue available to us to obtain energy in the U.S., including green energy sources. Maybe at the same time, we pursue T. Boone Pickens' idea of converting 18-wheelers to natural gas while finding other ways to conserve. Maybe we also adopt some form of energy tax credits or even a gas tax.
I don't know what kind of energy policy can be achieved politically -- we've now had major safety problems with coal, oil, and atomic energy in a relatively short period of time -- and that will make finding a common approach even more difficult. My guess is that one result of these recent problems may be to increase the potential emphasis on natural gas while lowering the emphasis on atomic power, particularly if things continue to worsen as they have in recent days. But what is important is that policymakers get together -- and get something significant done -- instead of simply paying lip service to the issue.
Further, whatever form such an energy policy takes, it should be done in a way that creates new private sector jobs. Getting out of today's jobs recession should really be the nation's top priority right now. But I'm afraid we won't be able to achieve that goal unless we simultaneously do something about gas and energy prices.
GMJ: I'm almost afraid to ask: Do you think that will happen this year?
Dr. Jacobe: The political calculus doesn't always work in conjunction with the nation's economic imperatives. The political decision to focus on healthcare reform while unemployment was running near double digits is an example of what I mean. As a result, the mid-term elections exacted a political price on the Democrats.
Right now, the political imperative seems to involve addressing federal spending and the nation's looming debt. American investors agree that the federal budget deficit and unemployment are top national priorities. And there is a lot of political momentum from the last election behind efforts in this area. Washington is likely to be consumed by federal budget battles and the need to extend the debt limit in the months ahead.
Can policymakers shift gears politically and prioritize a cooperative effort to create a meaningful plan that achieves U.S. energy independence? Maybe as summer approaches, $4 or $5 a gallon pump prices across the nation will combine with the continued jobs recession to change the political calculus. I'm still somewhat hopeful. I don't think members of either party want to run for re-election in the midst of stagflation or something worse. And that's likely to be the result if policymakers don't get together on a new energy policy in the months ahead.
-- Interviewed by Jennifer Robison