Irwin Stelzer: American Account
Goldman Sachs is on course to pay bonuses of $20 billion, or $700,000 per employee, twice last year’s payout, and Morgan Stanley is projected to top last year’s average bonus of $262,000 per employee with cheques close to $340,000.
But Americans began firing up their barbecues only after hearing that some 467,000 non-farm payroll jobs had disappeared in June, bringing the total number of jobs lost in this recession to 6.5m and the number of workers in search of jobs to 14.7m. The jobless rate has risen to 9.5%, almost double the rate when the recession began to bite. In addition, millions of workers have accepted pay cuts and reductions in hours. Things are so grim in some towns — 15 metropolitan areas have jobless rates in excess of 15%, and Detroit clocks in at 14.9% — that their mayors diverted funds from fireworks and parade budgets to supplement food banks and other programmes to ease the plight of the unemployed.
The Obama administration’s economists got it wrong. When the president was pressing for passage of his stimulus package, they predicted that it would create millions of jobs and cap the unemployment rate at about 8%. Congress gave the president the $789 billion he asked for, but the 2.5m promised jobs have failed to materialise. It turns out that the label “stimulus” was slapped on a grab-bag of spending projects that could not be initiated in time to boost the jobs market — only some 15% of the money has been spent.
The pre-holiday jobs report resulted in a spate of new forecasts. The gloomier analysts reason that consumers, who account for 70% of the economy and who have already pushed the savings rate to close to 7% after years in negative territory, will be more inclined than ever to avoid that trip to the mall. Perhaps most important, lay-offs, which originally hit young workers the hardest, are now affecting what the Lindsey Group consultancy calls “breadwinners”, men and women who head households.
Fear of what is to come is making even the nine-in-ten workers who have jobs cautious. Karlyn Bowman, the American Enterprise Institute’s doyenne of poll analysts, tells me: “Most Americans say they are cutting back because they are worried things might get worse, not because they need to make cutbacks.”
Many consumers can’t get credit on affordable terms: in a move that gives new meaning to the term “chutzpah”, Citibank, which is on government life-support, raised rates on outstanding credit card balances to beat an impending curb on such moves.
But there is also a good deal of evidence suggesting that the worst is over. Start with the housing market. Pending home sales are up, and the 0.6% decline in average prices in April was far less than the 2.2% drop in the previous month. Thirteen of the 20 metropolitan areas covered by the Standard & Poor’s/ Case-Shiller index recorded increases. There is little doubt that sales of repossessed homes at distress prices will continue to press on the market, but homebuilders are starting to see a pick-up in response to their own price cuts and still-attractive mortgage rates.
Conditions in money markets are somewhere between calm and buoyant. As investors become convinced that the world is not coming to an end, they are moving into riskier assets and out of Treasury bonds. Companies have found investors eager to snap up investment- grade bonds, and have issued them in record amounts. Indeed, even high-risk corporate bonds are again attracting investor interest: their price rose 22.4% in the last quarter. The ability to tap investors for cash is an important offset to the reluctance of many banks to lend — businesses in effect are eliminating the middle man. And the commercial paper market, to which businesses turn for short-term financing, is returning to a more normal level.
Even financial institutions, the sick men of the economy, seem to be returning to some semblance of health. Many have raised sufficient capital to repay the money the government made available when it looked as if the financial system was on the verge of collapse. The banks are not out of the woods, of course. Still on their books are billions in toxic assets, and there is little hope that the government programme to purchase these writedowns-in-waiting will succeed. Nevertheless, fears that the financial system will implode have given way to guesses at the pace of the recovery of financial institutions, many of which, by the way, are again hiring.
Banks are not alone is seeing better times. Inventories have been drawn down sufficiently to force restocking, boosting the hard-hit manufacturing sector. Activity increased for the sixth month in a row, and not only in the US. The Financial Times led its pre-holiday edition with a page one headline: “Data show evidence of global recovery, manufacturing in big economies picks up.” But every silver lining has a cloud: the paper also noted concerns that “the upturn will not be sustained”.
Here is how Americans are parsing all of this information. According to a CNN/Opinion Research poll (taken before the latest jobs report) 60% think the economy is starting to recover or that conditions have stabilised (12% and 48%, respectively), and 40% that conditions are continuing to worsen. Support for Obama’s economic policies has slipped from 65% to 58%, with independent voters leading the drift away.
The president has his team hinting that another stimulus may be on the way. That prospect sends chills down the spines of deficit hawks at the Fed and in the financial community. Roger Altman, chairman of Evercore Partners, an investment banking boutique, and Bill Clinton’s deputy secretary of the Treasury, says the deficit is already so large that “sometime soon, perhaps in 2010 . . . we’ll have to raise taxes”. That, Obama promised not to do.” (Irwin Stelzer, The Sunday Times). http://business.timesonline.co.uk/tol/business/columnists/article6637528.ece
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