David Leonhardt Sums Up a Gloomy Macroeconomic Situation

David Leonhardt writes:

Seeing an End to the Good Times (Such as They Were): The dismal jobs report released Friday showed overall employment to be lower than it was three months ago.... And if the good times have really ended, they were never that good to begin with. Most American households are still not earning as much annually as they did in 1999, once inflation is taken into account.... [A] prolonged expansion has never [before] ended without household income having set a new record.

For months, policy makers and Wall Street economists have been predicting, and hoping, that the aggressive series of interest rate cuts by the Federal Reserve would keep the economy growing, despite the housing bust. But the possibility seemed to diminish almost by the hour on Friday.

Shortly after 8 a.m., the Fed announced yet another measure meant to unlock the struggling credit markets. At 8:30, the Labor Department released the unexpectedly poor jobs report. Almost immediately, the economists at JPMorgan Chase -- who only last week had told clients they thought the economy was still growing -- reversed course and said a recession appeared to have started earlier this year....

Over the last year, the number of officially unemployed has risen by 500,000, while the number of people outside the labor force %u2014 neither working nor looking for a job -- has risen by 1.3 million.... Much of the economic stimulus put in place by the government will begin to take effect in the next few months, which does leave open the possibility that the country can still escape a recession. Policy makers have reacted quite quickly to this slowdown, relative to previous ones.

The Treasury Department will begin sending out rebate checks -- of up to $1,200 for couples, plus $300 per child -- in May, as part of the stimulus package negotiated by President Bush and Democratic leaders in Congress. The Fed has already cut its benchmark short-term interest rate five times since September, and such reductions typically take six months or more to wash through the economy....

The median household earned $48,201 in 2006, down from $49,244 in 1999, according to the Census Bureau. It now looks as if a full decade may pass before most Americans receive a raise.

Comments

[bakho]

However, if the price of oil stays where it is, the cost of gasoline will eat almost the entire stimulus. We are staring at price inflation while wages are stagnant or declining. The energy issue must be addressed and restructuring is required. There is no quick monetary fix that the Fed can deliver.

We import 10.1 million barrels of oil per day
At $50 per barrel the cost is $184 Billion per year.
At $100, per barrel an extra $184 Billion per year leaves the US economy.
Oil is over $100 per barrel.
The increased costs of energy imports is subtracting over 1% of the $14+ Trillion GDP.

At 389 million gallons of gas per day, an increase of $1 per gallon takes $142 Billion per year out of consumer pockets.
Recent forecasts are for at least $0.75/g increase by summer in the Midwest.

Not only are consumers paying more for gas, they are paying more for all products if oil is a substantial part of the production/transportation costs.

Maybe oil prices should be high to discourage consumption, but high prices will cause broader economic effects.

[bigTom]

The problem is how oil/gasoline prices are high -or rather where the extra money is going. If had were taxing carbon/oil/gasoline/diesel, then at least some of the extra cost could be recycled into the economy. Unfortunately we are counting on some of it coming back in the form of SWFs buying up depressed financial assets, but most will be spent/invested outside of the US. And it is not at all unlikely that $100 oil may become $150 or even $200 oil.

If you equate the 5 to 6.5% current account deficits we have been running as unsustainable consumption/stimulus, then won't going to a neutral current account balance mean losing something like 5-6.5% GDP? And if that is true, what if we are forced to start paying back the foreign debts? Even without the oil wealth outflows, we may find that we are ten percent or more poorer than we recently thought we were. Add in oil -and the huge cost of our militarism and foreign misadventures and it doesn't look like a pretty picture.

[walkingtheline]

Foreign misadventures are themselves major consumers of oil.