Uh Oh – In 2011 a Late Winter Recovery Stalled Out in the Spring and Summer – And History May Be Starting to Repeat Itself

Be Worried Mr. Obama, Be Very Worried

Last year at this time all of political pundits and economic commentators were enthralled about how the rapid rise in employment and economic activity was heralding that the economic crisis was over and the recovery was gaining strength.  This was not true, the economy stalled out in the late spring and summer, employment growth ceased and it took another six months for economic activity to become modestly robust again.

Now the same phenomena may be happening again.  The early economic indicators are showing some disturbing signs.

In recent weeks, European bond yields have started climbing. In the United States and elsewhere, high oil prices have sapped spending power. American employers remain skittish about hiring new workers, and new claims for unemployment insurance have risen. And stocks have declined.

So what is going on here?  For one thing the winter economic strength may have been serendipity, the result of a freakishly warm winter.  How does that help the economy?  Well lower heating costs have the same economic impact as a tax cut, they put more disposable income into the pockets of middle income consumers, and the resulting increases in spending will stimulate an economy in the same manner as a tax cut.  But in what must be a surprise to observers and politicians alike, winter is over.

Another thing that has gone unnoticed is that there is a world economy, not just a U. S. economy and that the world economy is not doing all that well.  It is slowly, very slowly beginning to dawn on people that European policy to produce economic austerity is producing economic austerity.  France is in trouble in both its economic and political spheres and Germany is finding out that relying on exports to drive an economy will only work if those countries to whom the exports are flowing have strong economies. 

China and India are also slowing down, and yes while China exports a whole lot, it also imports a whole lot.  The export market is important for the U. S. and when China slows down major U. S. industries also suffer.  So we get a wishy-washy forecast from the IMF like this.

The fund this week upgraded its estimate of global growth in 2012 and 2013 from estimates made in January, but did so with major caveats. “An uneasy calm remains,” said Olivier Blanchard, the International Monetary Fund’s chief economist. “One has the feeling that any moment, things could well get very bad again.”

which is the equivalent of saying that if things don’t get better they will likely get worse.

Add to all of this the uncertainty in the U. S. with respect to the elections and taxes, and the deep, almost unbridgeable divide in the United States between Conservatives and the rest of the country and the prospect that in 2013 government will be even more dysfunctional than it is now (yes, that is possible) and one gets a miserable summer and fall.

Oh yes, and what about gas prices.  Well they work the opposite of lower utility bills in the just completed mild winter.  Higher gas prices act like a tax increase, siphoning money out of the economy and reducing discretionary income and spending.  If gas goes over the psychologically important $4.00 per gallon the economy will suffer greatly, even if that suffering is from perception rather than reality.  In economics perception trumps reality.

As for Mr. Obama, an economic slowdown would almost certainly doom his re-election chance.  Mr. Obama cannot win the fall election, but Mr. Romney can lose it.  And so far his lackluster campaign along with his fealty to the extreme right wing of his party is doing that for him.  But if the economy goes south there may be nothing Mr. Romney can do to lose the election.