Politics & Policies of Economic Management (Part 1)

Pertinent views about government regulation evolution and how it impacts consumer-investors protection and innovation has been a sensitive subject of discussion, contention especially among analysts and largely investors and other professionals in the financial sector. The bottom line being the fact that government regulation is a double-edged sword because it does affect the cost doing business and the ease of doing business. And that sound government regulations should seek to create a business environment which reconciles the cost of doing business and the ease of doing business consequently setting conducive environment for investors. In this wise stimulating the inflow of investments and creation of jobs.

Strangely, regulations set by government have sometimes failed to convince the masses as to why the regulations are needed in certain sectors. The primary reason being differences in perception of people and an inherent resistance to change. For some skeptics, policies such as reforms at Wall Street and derivatives trading are deeper than they can imagine. They see such pursuits as being more of a political ideology or politically-oriented rather than policies that are healthy for management of the economy. For example, it is known by all economic analysts that fiscal spending is meant to increase aggregate demand and promote growth yet there is contention by some analysts on the massive stimulus spending by the current administration in the last year with regards to its capacity to create jobs. Unfortunately, such economic assertions by analysts may be paradoxical, unfounded and political since it is known by experience that stimulus package at least has been a primer for the rejuvenation of some major economies in the world including but not limited to United States, China, Japan and Brazil. The aftermath the current signs of recovery being witnessed globally. The following are some hard supportive, informative but comprehensive analysis substantiating the signs of recovery, contentions and issues of concern regarding policies for the long term economic management of the country.

The U.S economy according to the Bureau of Labor Statistics recorded a growth of 5.6% in the last quarter of year 2009 beating the expectations of most analysts. On average the country recorded 0.18% increase in 2009 as against a fall of 1.83% in 2008 and an increase of 2.53% in 2007. Perhaps, this is indicative of the recession bottoming out in late 2009. Next, in the month of March 2010, other economic indicators gave the following: Consumer Price Index (CPI) rose only 0.1%. Producer Price Index (PPI) rose 0.7% seasonally adjusted. Payroll employment had 162,000 jobs added in March and 290,000 jobs in April (a 79.01% increase meaning 128,000 jobs added). Productivity rose 6.9% in the last quarter of 2009. Again, productivity increased 3.6% in the non-farm business sector and 2.5% in the manufacturing sector in the first quarter of 2010. In fact, job gains occurred in manufacturing, professional and business services, health care, and leisure and hospitality and also in the government sector. Consumer confidence rose from March (consumer confidence index of 52.3) to April (consumer confidence index of 57.9). To appreciate these economic statistics perhaps there has to be a comparison of these figures with that of year 2007 when the recession is assumed to have officially started. On the other hand, the negative news was the slight increase in unemployment rate from 9.7% in March to 9.9% in April (a 2.06% rise). Let’s do the math here. When the percentage rise of 2.06% is multiplied by the more than 8.5 million people out of work, it translates into something more than 175,258 additionally meaning more than 8.67 million people may be out of work currently. Again, the figure 175,258 obtained is more than the payroll addition of 128,000 (March to April) which further validates the fact that more than 8.5 million people may be out of work. Also March average hourly earning fell by 0.2% even though weekly earnings were up by 0.1%. Interestingly, there is some contention by skeptics on the payroll employment statistic recorded. That the payroll employment included government temporary jobs such as the census workers meaning the payroll employment figures are overestimated. Here also the assertions may be political rather than true economic analyses. As a matter of fact the preceding statistics on the whole offers some blessings with regards to signs of recovery but calls for cautious optimism. We have every reason to remain cautious taking into consideration the sustainability of any gains for the leading economic indicators, the increasing federal deficit, national debt and balance of trade deficit. The balance of trade deficit as at February 2010 stood at $39.7 billion which further translates into an import to export ratio of about 9:1. That means for every dollar of goods exported about $9 dollars of goods is imported.

Now, the three non-trivial economic factors that should be of concern to everyone are an extended period of consumer spending slow growth, the high unemployment rate and the rising national debt. People may develop a funny feeling of recovery optimism considering the rise in consumer spending in April. With a rise in consumer confidence in April (the highest level since September 2008), it is expected to factor positively but not immensely into business hiring producing only a marginal change in employment. Should this trend in consumer confidence continue there is still need for caution regarding any recovery euphoria. In fact there is more saving than spending and also external investors are reluctant to invest in the economy because of the low interest rate of 0.25%. The propensity of the Fed to keep the rate at this level may have serious repercussions for the economy in the long term with regards to attracting foreign investors. Investments predominantly portfolio investment is being affected by this low interest rate. There is also the phobia of the dollar weakening in the future due to the mounting deficit and debt. Obviously, business will be affected and employment reduced leading to increased unemployment rate perhaps to something higher than 9.9% in the nearer future. In reality, whilst there is much worry when the unemployment rate of 9.9% is mentioned, it must also be made clear that unemployment is a lagging indicator which means more time is needed for it to show appreciable improvement. Perhaps it is right to forecast that the unemployment rate will max out in the next few months and then begin to drop. This will be realized when GDP growth becomes sustainable and recovery stabilizes. Over the next eight to twelve months, analyst should watch generally for sustainability of the gains in the leading indicators though some fluctuations are plausible. As a matter of fact, economists should be more interested in leading indicators as against lagging indicators or coincident indicators. The reason is that a leading indicator is a rate-determining factor for the emergence of an economy from recession. Upswings in leading indicators do suggest recovery is on track though lagging indicators such as unemployment rate and coincident indicators such as nonfarm payrolls may show otherwise.

Finally, the strength of the economy includes investor confidence. That is if foreign investors continue to find confidence in the U.S economy, then there is the likelihood of foreign investors still investing in dollar-dominated securities which will also help reduce the downward pressure on the dollar besides creating a surge in investments. Again, regarding consumer confidence there is some bit of mixed news even though it increased in the month of April yet it is purported not to immensely affect business hiring and for that matter reduce the unemployment rate in the short-term. The U.S economy is technically out of recession but growth will be gradual. In fact the situation can be likened to someone who has fallen into a bottomless pit. The way out of the pit for the victim has two levels of incline. The lower level has steep slope incline whilst the upper level has gentle slope. The journey up the lower level incline will be impacted greatly by gravitational and frictional forces on the plane such that progress appears to be stalled. The retardation effect of these forces may present the picture that no progress is being made. Nevertheless, little by little progress is being made up the incline. This is the situation the country is facing now. The economic forces of gravity and friction include the slowed growth in consumer confidence, mounting national debt, trade deficit among others. These may act in such a way it may appear that no progress has or is being been made. In other words, they present a picture of economic deceleration. In spite of this very soon the country will complete its journey up the steep slope and then enter the second level which is the gentle slope. Once it gets to the gentle incline, economic acceleration will be on track and the economic forces of retrogression will have less impact. Of course all these developments will depend on the kind of monetary and fiscal policies that will be in place.

Author: Charles Horace Ampong [MSc(Eng), MBA]
Blog: http://www.charliepee.blogspot.com/