economic recovery

So Ben Bernanke, the Fed chairman, today explicitly justified the logic for another round of quantitative easing (or "QE2") to salvage our sputtering economic recovery.  

On one level, what's striking about Bernanke's speech at a conference of the Boston Fed is how textured, detailed and unambiguous it is in trying to explain a decision the Fed won't officially make until at least Nov. 3.   Bernanke acknowledges that consumer spending has been inhibited by a "painfully slow'' recovery, that job growth is too slow to make any real dent in unemployment through the end of next year and that inflation is actually running unemployment is coming down too slowly and that inflation is "too low" for the Fed's comfort. Then Bernanke spells out the implications for monetary policy, with the bottom line being that the time is right for QE2.

I was in Las Vegas for most of the last week, and blogging was (tied with a lot of other things for the title of) the furthest thing from my mind.  But, being an economist, I am always on the lookout for markers of economic recovery. Walking around town, I noticed that there was barely any construction going on.  There is a new facility going up at the Venetian complex, but nowhere else that I could see.  But the best source of information always seems to be the taxi drivers.  We took a total of four cabs, two of whom had chatty cabbies.  The first told us that the recession ended in Vegas four months ago.  Since then, things have been back to normal.  The second suggested to us that the new normal wasn't as good as the old normal.  Conventions that used to not only bring people but throw lavish parties were still bringing the people but not throwing the same kind of parties.  Convention goers from nearby areas were finding their companies willing to fly them in and out for day trips rather than let them stay locally and potentially run up entertainment charges.

The big news today is the advance estimate of second quarter GDP, available here.  The top line number is that GDP growth was -1.0% at an annual rate in the second quarter, an improvement from the growth rate of -6.4% in the first quarter.  I think it is too early to identify the end of the second quarter as a business cycle trough -- we need to see whether GDP growth turns positive in the third quarter and whether there was a pickup in the other recession indicators. 

I wanted to take the occasion of this news release to dig a bit into the composition of GDP.  The following table (click on the thumbnail for a larger image) shows some data from Tables 1.1.1 and 1.1.10 of the National Income and Product Accounts.  The recession was precipitated by a fall in private investment, which includes equipment & software, inventories, and both residential and non-residential structures.  The table begins in 2006-I, the quarter in which private investment peaked.  The top panel shows the quarterly growth rates of each GDP component in the intervening period.  What is most surprising about the table is how little growth there has been in expenditures by state and local governments since the recession began -- in fact, quarterly growth has been negative in half of the quarters of the recession.

Over at FT.com, my friend Clive Crook has a well written piece on the fiscal stimulus and the debate over it success and failure.

The key to the post is its focus toward the end on the aftermath of the stimulus -- the deficits and debt that will be left when the economy has recovered.

This is not a new topic, of course. Congressional Republicans have been raising it for months as a reason not to like what the Obama administration proposed and Congress adopted.

But Clive's post is not a recital of the GOP talking points on the stimulus. The fact that he devotes about 40 percent of his thinking and writing to the next rather than the current issue is significant.  Clive is an intellectual leader and this is the kind of subtle revision in the public debate that often indicates the situation has changed and its time for the discussion to move on.

I've had the privilege of knowning and learning from Chuck Lieberman for a long time.  How long?  When I first met him back in the 1980s he was chief economist for Manufacturers Hanover.  I was having lunch with him on October 20, 1987, when the Dow dropped 508 points.

Very simply, when Chuck talks about interest rates -- I listen.  Which is why I'm passing along this brief article that he published yesterday.  Chuck's take is that the handwringing that has taken place over the past few weeks about inflation and rising rates is grossly misplaced.  The money quote:

"Near term, inflation is still more likely to slow down."

Take the time to read the whole article.  It's short and well worth your time.