Opinion

Nicholas Wapshott

The case for keeping Bernanke

Nicholas Wapshott
May 31, 2013 23:25 UTC

Whisper it abroad: The U.S. economy is on the mend. Most recent indicators suggest that, five years after the start of the Great Recession, the “L-shaped” recovery is finally heading north. The stock market is booming, and home prices are on the upswing. The rising price of houses makes people feel richer, and consumer confidence is on the mend. Private borrowing is up, and consumers are starting to spend again.

Growth is not great, about 2.5 percent to the end of the year, when the postwar average is 3.2 percent, but it is steady and appears to be self-sustaining. And this despite the 1.5 percent reduction on what growth would be were it not for the clumsy sequester’s fiscal drag. The general outlook is bright, if not sunny. As Winston Churchill said after the Battle of Alamein, “This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

Why whisper this good news? Because the idea that we have achieved recovery suggests to some it is time for the Federal Reserve to change tack. Monetary policy is the only instrument the administration has left. Hampered by a hostile House of Representatives, President Barack Obama’s “jobs bill” to stimulate the economy is long forgotten. Even he doesn’t mention it anymore.

But the Fed has a medium-term strategy that means keeping interest rates low so long as unemployment remains stubbornly high. It therefore plans to continue pumping money into the economy through quantitative easing at the rate of $85 billion a month to the horizon. The last meeting of the Fed’s board maintained a steady-as-she-goes policy, with the usual suspect  in the minority anxious about the inflationary implications of quantitative easing.

There is no inflationary pressure, nor is there likely to be. The austerity policies of the European Union, the only rival to America in terms of size and sophistication of economy, have pushed the euro bloc into recession and are keeping the euro weak. The same is true of Britain, where austerity has led to a near-triple-dip recession and sterling is trading lower. America’s old trade rivals the Japanese are on a QE binge, and the yen is sinking fast. As the world’s biggest economy is still growing, there has been a flight to the dollar that has pushed up the exchange rate and kept domestic inflation down.

Economic recovery may come too late for Obama

Nicholas Wapshott
Oct 26, 2012 20:20 UTC

The green shoots of recovery are growing a little taller. Newly released gross domestic product estimates   measuring consumer and government spending, investments and net exports   show the economy growing at 2 percent in the third quarter, up from 1.3 percent in the second. In normal times, this would be nothing to get excited about; average GDP growth between 1947 and 2012 was 3.25 percent. But we are recovering from a systemic financial crisis, not a routine dip of the business cycle, and in such cases recovery is noticeably more sluggish. Don’t believe Cassandras who suggest the good news is a chimera. We are in  an “L”-shaped recovery rather than a “V”-shaped one, and the fact that GDP is steadily rising is in itself encouraging.

What effect will this figure have on the election? A single statistic, like a single opinion poll, is just a snapshot. As with polls, to understand what is going on, you have to look at the moving pictures rather than a single frame. And growth figures, like polls, are open to revision. There is a predictable margin of error. Within a month the 2 percent GDP estimate will be revised; historically it has moved within a range of 0.5 percent up or down. So we may be looking at GDP growth of 2.5 percent or 1.5 percent, but we won’t know which before Nov. 6. With the general election near, any evidence, however small, is going to be closely scrutinized. On its own, the 2 percent figure does not tell us much, so we should not be distracted by those who make big claims about it one way or the other. What is significant is that it is part of a growing trend suggesting that the economy is slowly emerging from its slumber.

Take housing. The latest figures, for September, show a surge in new homes, up 15 percent in a single month, the fastest growth in four years. As the current financial crisis was founded on a housing bubble, the fact that builders are speeding up their housing starts suggests the economy in general is steadily recovering. The housing figures are good news for employment, too. For every new house built, at least three jobs are created. Sales of new homes are also on the rise, and inventory has fallen “to the lowest level on record.

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