We are at a strange, jittery moment for the U.S. economy. We’re all, essentially, like a car on a winding road about to turn a bend with no idea whether it’s a nice, smooth road ahead or a perilous mountain climb. Here are the reasons to think that it may be a rocky next few months.
Syria could spiral in who knows what direction. The violence in Syria is escalating, and Western powers appear on the verge of air strikes. The turbulence has already driven oil prices up on global markets, and it is quite uncertain where things go from here. Almost no one is predicting a peaceful end to the civil war in the forseeable future; the best that people worrying about the U.S. economy can hope is that it remains contained to Syria and doesn’t spill out into something more disruptive across the Middle East.
The price of oil has risen nearly $20 a barrel since April. Those increases will start to filter into higher prices for imported petroleum products for Americans, depressing growth.
It’s fiscal standoff time . . . again. The government again needs to be funded, and the debt ceiling again needs to be raised, and Republicans are again looking to use their control of the House to extract some policy concessions from the White House in order to go along. There is a striking difference of views on what is likely to happen among Washington policy types compared with financial market mavens.
In Washington, there is little sense that the groundwork has been laid for a successful resolution of the standoff, with Republican rank-and-file tired of their leadership’s dealmaking and eager to hold the line. In this view, a government shutdown is likely and more debt ceiling brinksmanship a strong possibility.
On Wall Street, by contrast, there is a sense of calm, with the Washington worriers playing the role of the boy who cried wolf. They’ll work it out, because they always work it out, goes this logic. Any who bet otherwise during the fiscal cliff standoff last December paid a price; while there was an uptick in volatility in the final day or so of negotiations, it was short-lived, and the financial markets enjoyed a veritable boom in the early months of 2013 once the fiscal cliff was resolved.
The Fed looks to the exits. The nation’s central bank has signaled that it will begin slowing the rate of its $85 billion-a-month in injections of money into the economy, perhaps starting at its policy meeting just two weeks away. That seems to have been priced into markets already, since Chairman Ben Bernanke began signaling that direction in June, though all these other factors hanging over the outlook could make some at the central bank hesitant about pulling the trigger in September. That said, some recent data has pretty clearly pointed to continued growth, including a report Tuesday that the nation’s manufacturing sector grew more quickly in August (the Institute for Supply Management index rose to 55.7, its highest level in more than two years). A crucial unemployment report due out Friday may well tip the balance.
WWLSD (What Will Larry Summers Do?). Essentially, back in the spring, the path forward for Fed policy seemed as clear as day. Janet Yellen, the vice chairwoman and, it seemed to many at the time, the slam-dunk candidate to succeed Bernanke, even sketched out in a speech on exactly what future interest rate policies she thought would be justified over the years ahead. The other leading candidate, by contrast, has given little clear indication of his monetary policy stance, and so analysts have tried to fill in the blanks based on Summers’s speeches and comments over the years.
They’re concluding — from that limited evidence — that Summers will be a more hawkish Fed chair than Bernanke has been or Yellen would be. And the increased likelihood that he gets the job appears to be a factor behind higher interest rates. Since my colleague Ezra Klein wrote a July 23 piece saying Summers was the front-runner for Fed chief, 10-year borrowing costs have risen from 2.5 percent to nearly 2.9 percent. It is hard to know with any precision how much of that is a Summers effect and how much is other factors, like signs that the Bernanke Fed itself is looking a bit more hawkish than it did a few months ago.
Add to that general view of Summers’s hawkishness the fact that, if appointed, he will face what could be a tumultuous confirmation process, in which markets will seize on every utterance to try to predict the course of Fed policy. This could be a volatile few months in the money markets.
Delayed effects from higher rates. Rates started spiking well before the Summers boomlet, dating to when the Fed first began its talk of tapering bond purchases. But changes in the cost of borrowing affect the overall economy only gradually, over many months. For example, a spike in mortgage rates may eventually mean fewer homebuyers, less upward pressure on prices and then less homebuilding activity, but that series of events takes many months to pan out. And rates have been rising rapidly since the start of May. The 30-year fixed-rate mortgage is up from 3.4 percent to 4.46 percent since the start of May, according to Bankrate.
We don’t know exactly how much damage higher rates might do to housing, auto sales and other credit-dependent markets. We don’t know when it will hit. But it’s hard to imagine that large a swing in rates having no effect.
To these five reasons to be wary of the economic future, we can add a bonus No. 6:
The starting point ain’t that great. Through the first eight months of 2013, the U.S. economy seems to have done . . . fine. Ho hum. More of the same. Meh. Fiscal austerity hasn’t caused the sharp slowdown many economists feared. Federal Reserve policy has probably helped offset some of the pain. Growth has been in the 2 percentish range, which is pretty much where it has been for the duration of the sluggish recovery over the last four years. We’ve added an average of 192,000 jobs a month in 2013, which is just a leetle bit better than the 183,000 a month added in 2012 or 175,000 of 2011.
This isn’t the late 1990s, where the starting point was 4 percent growth, so a little emerging markets crisis here, higher interest rates there, a fiscal standoff there could damage the economy but still leave growth in healthily positive territory. If one or more of these factors exact major damage to growth in 2013, not much stands between the United States and another downturn.