Adrift in the Fog

George Bernard Shaw once said “if all economists were laid end to end, they would not reach a conclusion.” Someone later added that laying them end to end would not necessarily be a bad thing. At any rate, Bloomberg news reports that 67 of them recently polled, called for economic growth to resume in the second half of this year. The median estimate is for 3.2% growth following a disappointing 2.3% this latest quarter. They say that “rising exports, stable fuel prices, record levels of cash in company coffers and easier lending rules will be enough to overcome the damage done by one-time events like poor weather and the disaster in Japan.” They also expect that the Fed will wait even longer to raise interest rates next year.

The S&P 500 is off about 5% from its 2011 high reached on April 29th on recent news of the slowing economy. During the same period, the yield on the 10-year Treasury note declined to 3% from 3.29%. Economists forecast the yield will rise to 3.65% percent in the fourth quarter, which is down from a prior estimate of 3.8% according to Bloomberg.

Fed Chairman Ben Bernanke’s talk on Tuesday helped drive down stock prices as he indicated that the economy is still below its potential and that accommodative policy (low interest rates) is still needed. He said that the economy is temporarily softened by the tsunami and earthquake in Japan, but he anticipates hiring will pick up from May’s puny pace. He sees stronger job growth as critical for recovery and is concerned that more than half of the unemployed have been unemployed for more than six months. Bernanke and many business leaders are calling on Washington to create a credible plan for long-term fiscal consolidation to reduce the pall of uncertainty out there. As noted in last week’s Brief, businesses don’t hire when they are uncertain about the economy, taxes, benefits, and the regulatory environment.

Initial jobless claims are not coming down, but they are at least stable. Initial claims came in at 427,000 in the June 4th week vs. a revised 426,000 in the prior week and 429,000 the week before that. The four-week average of 424,000 is down 2,750 in the week and is down nearly 15,000 from a month ago.

Bloomberg’s Consumer Comfort Index rose to minus 45.9 last week for the third consecutive time as lower gasoline prices improved Americans’ financial outlook. It was -47.1 the previous week. Across all income groups, sentiment improved the most among those making less than $50,000 a year Bloomberg reported. But it’s hard to get excited about minus readings.

Economists believe that the economy has sufficient strength to plow through the fog and get back to its potential of over 3%. Are they overly optimistic or do they believe that perhaps Washington’s eventual answers as to how they will address the deficit will provide some economic push? It seems clear at this point that no amount of economic stimulus would be more welcome from Washington than credible and stable policies for taxation, regulation, and entitlement spending. Mr. President and members of Congress, please chart us a course through this fog.

Have a nice weekend.