‘Recovery Summer’ goes bust 

Declaring a "Recovery Summer" victory tour at the start of June must have looked like a pretty safe wager for the Obama administration. The economy seemed to have shifted firmly into gear during spring. Lawrence Summers, director of the National Economic Council, told the Financial Times in early April that the economy was "moving toward escape velocity. You hear a lot less talk of ‘W’-shaped recoveries and double-dips than you did six months ago."

A big reason for White House optimism was a stronger job market. The economy added an average of 320,000 net new jobs a month during March, April and May, about half of them in the private sector. Granted, the unemployment rate still hovered close to 10 percent. But if the economy kept growing at a 3 percent annual clip or greater — creating lots and lots of new jobs in the process — unemployment would eventually fall, perhaps dramatically.

Since then, however, the economy has fallen back to Earth, and "Recovery Summer" looks more like a bad bet. Private sector job growth has fallen by two-thirds, and the unemployment rate is still at a sky-high 9.5 percent. And if the size of the U.S. work force, as measured by the Labor Department, had stayed constant since April — instead of shrinking by a million — the unemployment rate would be 10.4 percent. Jobless claims are at their highest level since February. Worse yet, the expansion is decelerating. After growing by 5.7 percent in the final quarter of 2009 and 3.7 percent in the first quarter of 2010, gross domestic product advanced by just 2.4 percent from April through June, according to the Commerce Department.

The White House didn’t count on a summer swoon. Then again, it has suffered bouts of premature and unfounded economic optimism before, a malady that has led it to make a number of losing bets and faulty assumptions — which, in turn, have created an even worse environment for growth and jobs. Among them:

High unemployment is a psychological anomaly. The White House continues to be overly hopeful about jobs.

America has economic immunity. The White House is no fan of the idea that the U.S. economy has entered a stagnant state. We could be in a situation where debt overhang after a financial meltdown forces consumers and businesses to retrench for years.

Ben Bernanke’s got our backs. During the 2000 presidential campaign, Sen. John McCain joked that if former Federal Reserve Chairman Alan Greenspan died, it would be wise to prop up his corpse and keep him on the job. Few observers hold Fed chairmen or the central bank in such high esteem these days. But, the White House apparently does. After passing a giant stimulus in 2009, the administration pivoted to "the agenda" — health care, financial reform, cap-and-trade. Jobs and the economy? Certainly the combination of higher government spending and oodles of monetary stimulus from Bernanke and company would be enough to spur a return to growth.

The results of that policy positivism have been gloomy and seem unlikely to brighten. A recent analysis by the San Francisco Federal Reserve Bank of forward-looking economic indicators found that "the macroeconomic outlook is likely to deteriorate progressively starting sometime next summer, even if the data suggest that a renewed recession is unlikely over the next several months." And, the job market is full of worrisome signs. The extended period of high unemployment may be turning from cyclical to structural, where there are not enough qualified and employable applicants for new job openings.

Of course, the administration could dramatically change course and join with a more Republican Congress next year to both lower the long-term debt outlook and boost the economy by slashing taxes on capital and corporations.

But don’t bet on it.

 

This article appeared in The Weekly Standard.

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