Signs Point to Economy’s Rise, but Experts See a False Dawn

Even as news come in for unexpectedly good economic data, experts are warning that this is only going to be temporary and does not represent a start to a strong and stable recovery.

Published: Thursday, 22 Dec 2011 | 7:02 AM ET
By: Annie Lowrey- The New York Times
CNBC

As the fourth quarter draws to a close, a spate of unexpectedly good economic data suggests that it will have some of the fastest and strongest economic growth since the recovery started in 2009, causing a surge in the stock market and cheering economists, investors and policy makers.

Joseph Sublett, the manager of a ConocoPhillips station in Little Rock, Ark., posted lower gas prices on Dec. 1. A collection of unexpectedly good economic data in recent weeks is welcome but may be the result of temporary factors, economists say.

In recent weeks, a broad range of data — like reports on new residential construction and small business confidence — have beaten analysts’ expectations. Initial claims for jobless benefits, often an early indicator of where the labor market is headed, have dropped to their lowest level since May 2008. And prominent economics groups say the economy is growing three to four times as quickly as it was early in the year, at an annual pace of about 3.7 percent.

But the good news also comes with a significant caveat. Many forecasters say the recent uptick probably does not represent the long-awaited start to a strong, sustainable recovery. Much of the current strength is caused by temporary factors. And economists expect growth to slow in the first half of 2012 to an annual pace of about 1.5 to 2 percent.

Even that estimate could be optimistic if Washington lawmakers fail to extend aid for the long-term unemployed and a payroll tax cut for the United States’ 160 million wage earners.

At stake is about $150 billion, the bulk of which would go to middle-class families and the unemployed. If Congress does not pass the measures, economists say, it would significantly weaken growth from already-damped levels anticipated early in the new year.

“Unfortunately, I think we’re going to see a slowdown over the course of next year,” Ethan Harris, co-head of global economics research at Bank of America Merrill Lynch, told reporters last week. “Not only do we have the European crisis spilling over and hurting U.S. trade and confidence,” he said, but the United States economy also faces “homegrown shocks.”

There are two reasons for the renewed pessimism. First, economists say that temporary trends increased growth in the fourth quarter and may not continue into next year. Second, the economy faces significant headwinds in 2012: some from Europe’s long-lingering sovereign debt crisis, and some from domestic cutbacks beyond the control of President Obama, whose campaign would like to point to a brightening economic picture, not a darkening one. Even the Federal Reserve is predicting that the unemployment rate will remain around 8.6 percent by the time voters go to the polls in November.

The fourth quarter benefited, for instance, from wholesalers restocking inventories of goods like petroleum, paper and cars, giving a jolt to growth.

“We had lean inventories, so those required additional production to satisfy demand,” said Gregory Daco of IHS Global Insight. “But once inventories are restocked, there is no need to restock them anymore. That means there’s going to be less production,” he said.

Consumers also pulled back on their savings, helping to finance a recent spurt in spending. a trend that forecasters doubt will continue. Other short-lived factors include falling gasoline and commodity prices, and an increase in orders from Japanese companies returning to business after the devastating spring tsunami.

But next year, Washington is increasing some taxes and reducing spending as temporary measures enacted during the worst of the recession expire. That will damp growth by a percentage point or more next year, forecasters say. Provisions like a tax write-off to help businesses pay for equipment are winding down or ending.

Most worrying is the prospect that Congress will drop aid for the long-term jobless and allow payroll taxes to rise to 6.2 percent from the current level of 4.2 percent, amounting to a $1,000 tax increase on the average wage earner. Macroeconomic Advisers, a prominent forecaster, estimates that the expiration of the two provisions could cost the economy 400,000 jobs and cut growth by half a percentage point next year.

How and when Congress acts will also have an important, if impossible to quantify, impact on consumer and business confidence, economists say. Households and companies uncertain about their income, unclear about their tax rates and lacking confidence in their government might hold off on major financial purchases and tighten their purse strings.

Then there is Europe.

“If there is some Lehman-type event in the first half of the year, it will have a big impact,” said Joel Prakken, chairman of Macroeconomic Advisers. The collapse of Lehman Brothers, a New York investment bank, in late 2008 helped set off the financial crisis.

Even without such a major event, forecasters say problems on the Continent will weigh on American growth next year. Investor flight from assets denominated in the shaky euro have made the dollar stronger and American exports less competitive abroad. The euro zone’s woes have also made a global slowdown more likely, which could mean a reduction in American exports to emerging-market countries as well.

For now, Democrats and Republicans remain at loggerheads, blaming each other for the uncertainty around the payroll tax rates and aid for the unemployed.

“A two-month extension creates uncertainty and will cause problems for people who are trying to create jobs,” John Boehner, Republican of Ohio and speaker of the House, said on Monday.

“The clock is ticking. Time is running out,” President Obama said at a White House news briefing on Tuesday. “One of the House Republicans referred to what they’re doing as ‘high-stakes poker.’ He’s right about the stakes, but this is not poker. This is not a game.”

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