David Blanchflower: After a week of nasty surprises it looks as if the Grinch is back

Economic Outlook: Any more nasty surprises and the MPC would likely extend the QE programme
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The Independent Online

Dartmouth Medical School was renamed last week as the Geisel School of Medicine at Dartmouth in honour of Audrey and Theodor "Ted" Geisel. Ted Geisel, who died in 1991, won a Pulitzer, three Academy Awards and two Emmys, but is probably better known as Dr Seuss, who authored and illustrated over 50 children's books including The Cat in the Hat, How the Grinch Stole Christmas! and Green Eggs and Ham.

It remains a tradition for incoming Dartmouth freshmen to be served green eggs and ham for breakfast in honour of Dr Seuss.

The Geisels had no children (Ted famously said, "You have 'em; I'll entertain 'em."). When Audrey Geisel passes away, the College will become the owner of a large chunk of the Geisel empire, which includes the rights to the Dr Seuss books and other products. The proceeds will be used to fund medical education; the value of the estate likely runs into hundreds of millions of dollars, which will make the Geisels Dartmouth's biggest ever donors.

The gift is reminiscent of the Great Ormond Street Children's Hospital receipt in April 1929 of the playwright JM Barrie's copyright to the Peter Pan works and subsequent incomes. These are examples of nice surprises.

Even though the US economy is recovering and the UK economy is stagnating, the path ahead for both countries is not going to be a smooth one. Last week there were nasty surprises in both countries. The good news in the US wasn't quite as good as I had hoped. In the UK the bad news was worse than I had feared.

The minutes of the last Federal Open Market Committee (FOMC) meeting on 13 March, published last week, showed that the majority of members were in waiting-and-watching mode because recovery in the US seemed well under way, and if anything they thought that the strength of the recovery was surprising on the upside. The markets took this as a sign that QE3 was less likely and fell sharply on the news. The minutes revealed that there was a dissenting vote by Jeffrey Lacker, the inflation hawk and Richmond Fed Governor, who explained his opposition to the majority view because he "did not agree that economic conditions were likely to warrant exceptionally low levels of the federal funds rate at least through 2014".

Sound familiar? Inflation in the US is currently 2.9 per cent and 2.2 per cent excluding food and energy, while real wages in the US private sector have risen by only 7 per cent over the last decade, so as in the UK wages are the dog that didn't bark and are unlikely to do so.

Jobless claims numbers in the US, released on Thursday, were grounds for optimism, dropping by 6,000 to 357,000 to the lowest level in four years, and close to the median forecast of 355,000 by economists in a Bloomberg survey. The big release, though, was the Jobs Report on Friday for March, which was expected by economists to show a growth of at least 200,000 jobs but dashed hopes with a disappointing 120,000, the fewest in five months. It was driven by private sector job growth, as public sector employment was essentially unchanged. It followed a revised 240,000 gain in February that was bigger than first estimated. The number of unemployed fell by 130,000 and as a result the unemployment rate fell to 8.2 per cent.

The US private sector continues to deliver jobs, but the rate of improvement has started slowing. If this trend continues this raises the chances the Fed will loosen further with QE3. Over the last 18 months under Obama the US economy has added nearly 3 million jobs. To put this in context, under Cameron over the same period the UK has seen a decline in employment of 30,000.

There has been growing sense that perhaps things in the UK had started to improve. The quarterly survey from the British Chambers of Commerce was mildly optimistic, and all three of the purchasing manager indices for industry, services and construction had also improved. These pleasant little surprises even led the UK's pet hawk, Andrew Sentance, to foolishly claim, all too soon, that the OECD had been wrong to suggest that a double-dip recession was on its way. He declared the score UK 6, OECD nil, even though the game hadn't even entered the second half. As usual, Mr Sentance's predictions are strongly negatively correlated with actual outcomes, and, not unusually, one day later he was left looking silly.

The Monetary Policy Committee made a widely anticipated decision last week at its monthly meeting to hold interest rates at 0.5 per cent and maintain its asset purchase programme at £325bn. Messrs Posen and Miles likely dissented in favour of more QE once again. That the MPC didn't move was no surprise, especially given the very poor industrial production figures that were published on the morning of the decision that they would have seen. These came as a bad surprise to the markets that had been expecting an increase. Sorry Andrew mate, wrong again. Industrial production fell by 2.3 per cent in February 2012 compared with February 2011. Manufacturing output fell by 1 per cent on the month and has fallen for seven of the last eight months. This was the biggest drop in output since April, plus the manufacturing data in January was revised down by 0.4 per cent.

The weak industrial production data are inconsistent with the PMIs but are consistent with weak reports from the Bank of England's agents. They are consistent though with the latest data from the European Commission's economic sentiment index for the UK, which combines confidence surveys from retailers, manufacturers, the service sector and consumers. Sam Tombs from Capital Economics has pointed out that the series remains at levels currently that are consistent with the UK being in a recession. The MPC is also waiting and watching, but any more nasty surprises like this would mean they would likely move to extend their QE programme, perhaps even as early as May. Still no growth, George.

That, then, brings me to the tax changes that will be implemented at the beginning of the financial year that presumably will come as a nasty surprise to many people. According to the IFS, a million families with children will lose £511 per year. The Grinch-like Coalition looks to have already stolen Christmas away from many kids. No green eggs or ham for them.

"Unless someone like you cares a whole awful lot, nothing is going to get better. It's not." – The Lorax by Dr Seuss.