US Outlook: It may the Labour Day bank holiday weekend here in the US, but there is precious little to be cheerful about on the labour front. The latest monthly report shows that unemployment in the world's largest economy surged from 9.4 per cent in July to 9.7 per cent in August. The rate of decline in the number of payrolls has slowed, but we are only back to the same level as a year ago, just before the failure of Lehman Brothers turned a pretty awful recession into something much worse.
So that's the picture now. The frustrating thing about the August figures, released yesterday, is that they advance precisely no one's view of the future. We are in an economic limbo. The US government's $3bn vehicle scrappage programme, the so-called "cash for clunkers" scheme, means car companies are calling workers back to ramp up the production necessary to replenish depleted showrooms. The hope is this can create a virtuous circle of improved wages and increasing consumer demand, but it could be interrupted if car sales fall suddenly back.
Elsewhere in manufacturing, employers who engaged in savage layoffs during the post-Lehman months had tapped remaining staff to work longer hours this summer to refill stockpiles, but that appears to have gone into reverse in August.
In other words, the benefits of government stimulus and from private sector inventory replenishment are clear. But these are sparks. There is precious little sign yet that the tinder is alight. A sustainable economic recovery is still not assured. The advocates of a U-shaped recovery predict it is just a matter of time; the douple-dippers, prophesying their W shape, say things will get worse again when the stimulus runs out in the middle of next year.
People should be more alarmed about the prospect of a double-dip recession than they seem to be. A second leg downward would not just be a human catastrophe when the unemployment rate jumps well into double figures. It would also throw off a lot of the calculations on which the solvency of US banks was measured in stress tests carried out in May, and could precipitate a second financial crisis. Such a scenario could be the final signal to foreign investors that it is time to start pulling money out of the US, or at least to demand much higher interest rates. That is something they would feel much safer doing next year than they did in 2008, now that China's economy has proved its mettle and could provide an alternative focus for growth.
It's an Armageddon scenario I don't actually believe in. Stimulus does take time to work, but confidence is building among consumers and, slowly, among businesses. The anniversary of Lehman serves to remind us how scary those autumn months felt, and to highlight how far improved conditions are. But it is an Armageddon scenario so serious that policymakers should be laying the groundwork now for a second stimulus. Insisting that the stimulus is working might be fine if all you are trying to do is shore up public confidence, but there needs to be a Plan B.
The US has more economic room to manoeuvre than many other countries, notably the UK, but it seems to have less political room. In an August poll, 60 per cent of Americans said the existing $787bn was not helping the economy. However erroneous the view, it's not a situation that lends itself to political support for a second stimulus.
This is a problem that has been vexing Joseph Stiglitz, the Nobel prize-winning economist who headed Bill Clinton's council of economic advisers in the White House. He points out that the headline figure for the first stimulus overstates the fiscal boost to the economy from expanding government spending. At the same time as the federal government was handing out tax cuts and gearing up infrastructure spending, individual states – most of them legally obliged to balance their budgets – will have to slash $400bn of their spending because of falling tax receipts.
Stiglitz is pushing what he calls "revenue sharing", a plan where the federal government will compensate individual states for a dip in tax revenues for which they can hardly be blamed. It's a stimulus plan by another name, and the name is important. As a Plan B, it is a beguiling one. It is to be hoped that politicians begin laying the ground for it, a kind of economic insurance, before it becomes too late.Reuse content