Economy Gaining on Government

It was a light week for economic data, but the bulk of it was very encouraging. Yesterday, the Treasury announced that tax receipts are rising faster than government spending. It is a clear sign that the economy is gaining strength. The Treasury’s budget showed that tax receipts are up 9.4% while government outlays rose only 4.8%. Four months into the fiscal year, the deficit is at $418.8 billion, down from $430.7 billion a year ago. Any news that the economy is growing faster than the government is good news.

The jobs market may finally be improving too. Yesterday’s weekly jobless claims report for the February 5th week showed a steep 36,000 decline in initial claims to 383,000. That total represents the lowest 2-1/2 years. The four-week average fell a substantial 16,000 to 415,500.

Speaking to the House Budget Committee Fed chair Ben Bernanke said that the unemployment rate is likely to remain high “for some time.” While optimistic overall, he cautioned that “with output growth likely to be moderate for a while and with employers reportedly still reluctant to add to their payrolls, it will be several years before the unemployment rate has returned to a more normal level.”

In his testimony, the Chairman said “on the inflation front, we have recently seen increases in some highly visible prices, notably for gasoline. Indeed, prices of many industrial and agricultural commodities have risen lately, largely as a result of the very strong demand from fast-growing emerging market economies, coupled, in some cases, with constraints on supply. Nonetheless, overall inflation is still quite low and longer-term inflation expectations have remained stable. Over the 12 months ending in December, prices for all the goods and services consumed by households (as measured by the price index for personal consumption expenditures) increased by only 1.2%, down from 2.4% over the prior 12 months.”

He went on to explain how economists assess trends by following several alternative measures of inflation; “one such measure is so-called core inflation, which excludes the more volatile food and energy components and therefore can be a better predictor of where overall inflation is headed. Core inflation was only 0.7% in 2010, compared with around 2-1/2% in 2007, the year before the recession began. Wage growth has slowed as well, with average hourly earnings increasing only 1.7% last year. These downward trends in wage and price inflation are not surprising, given the substantial slack in the economy.”

While Mr. Bernanke had their ears, he made sure that lawmakers understood the Fed was in no way underwriting the nation’s debt with its plan to buy $600 billion in Treasury securities through June. He said this policy was “a relatively modest policy undertaking” compared with balancing the $3.7 trillion budget. Bernanke said “what we’re doing here is a temporary measure, which will be reversed.” QE2 is “providing significant support to job creation and economic growth.” A growing number or lawmakers question the efficacy of the Federal Reserve in employment. Representatives Paul Ryan and Mike Pence in the House support legislation by Tennessee Senator Bob Corker to remove the Fed’s employment mandate and have it focus solely on keeping prices stable.

On the home front, the news for existing home owners wasn’t good, but home shoppers should take note. Home values in the United States posted their largest quarterly decline since the first quarter of 2009, falling 2.6% as the temporary stimulus of the home buyer tax credits wore off, according to Moody’s Analytics reports that home affordability returned to pre-bubble levels in a growing number of US markets over the past year as price declines laid the groundwork for a housing recovery.

Moody’s suggests that housing affordability at the end of September returned to or surpassed the average reached between 1989-2003 in 47 of the 74 markets it tracks. Mark Zandi, chief economist at Moody’s Analytics said “based on incomes, this is as affordable as it gets.” At the same time, price declines are leaving more borrowers underwater, or in homes worth less than the amount owed. Nearly 27% of homeowners with a mortgage were underwater at the end of the fourth quarter, up from 23.2% in the previous quarter, according to data on, a real-estate website.

Following through with his own efforts to use the bully pulpit to stimulate the economy, President Obama addressed business leaders at the US Chamber of Commerce Monday. Unfortunately the speech, while well-intended, missed the mark in the minds of business people. He told them they should stop hoarding cash and start hiring in return for tax breaks and other government support for exports and innovation. He called on them to use the $2 trillion in cash on their balance sheets to “get in the game” and start adding jobs in the US, despite slow growth in consumer demand. He said “Ask yourselves what you can do for America; ask yourselves what you can do to hire American workers, to support the American economy, and to invest in this nation.”

The Wall Street Journal quoted a response from Harold Jackson, chief executive of Buffalo Supply, Inc. a medical-supply business based near Denver. Mr. Jackson said “I kind of resisted the implication that businesses have a moral responsibility to hire people, I think it’s a little outside the bounds to suggest that if we hire people we don’t need, there will be more demand.” Matthew Shay of the National Retail Federation questioned the president’s emphasis on business investment as the key to recovery. “The recovery is going to be driven by the 70% of the economy that is consumption, not the 15% that’s investment.”

The two major drivers which propel consumption in our economy are jobs and housing. The recent trend for both is positive, but strength and momentum will remain weak for a prolonged period according to the experts. The very best thing Washington can do to help is to shrink.