North Carolina Economics

Frayda asks

The experts are weighing in about the effect of the stimulus money now that the government is releasing numbers. How do you think the public should assess the value and impact, both in terms of short and long term benefit to the economy?

This is obviously a politically charged question, but I’ll do my best to navigate those shoals.

Its generally accepted among forecasting economists that the stimulus is largely responsible for the upturn in growth that we’ve seen.

Some of this is simple accounting. Without the stimulus state and local government spending would have collapsed even further than it did, because many state and local governments are required to run balanced budgets.  Most states, including North Carolina, are balancing their budgets on the back of stimulus.

The vast majority of Americans also received a tax cut under the stimulus and though forecasting economists disagree on how much impact that had on spending, most of us believe that it had some. 

Both of those effects boosted the economy in the third quarter. That’s the immediate impact of the stimulus.

Where the debate gets a little rougher is on the issue of “priming the pump.”  I believe that the stimulus has increased and will continue to increase private spending in the economy. The rationale is that when households are uncertain about the future they decrease spending and increase savings.

State employees in particular would have faced much more uncertainty had their been no stimulus.  Many more would have been laid off. In response, they would have then decreased their spending. This reduction in spending would have meant more uncertainty for local businesses. This would have led them to trim workforces in order save cash. This results in less spending by their workers and so on. The cycle continues, weakening the entire economy.

When the economy has a functioning financial sector this vicious cycle is arrested by falling interest rates. More and more people are saving. This means more and more money piling up in the banks. In response the banks lower the interest rates they give on savings accounts and CDs, which slows down some of the savings.

The banks also lower the interest rate they charge borrowers. These lower interest rates cause people to go out and buy more houses and more cars. This increases spending, which reduces uncertainty and starts the economy growing again. This is why forecasting economists look to housing sales and auto sales to predict the end of a recession.

Currently, however, financial markets are not functioning well. Moreover, there is still a large inventory of unsold homes. This makes it unlikely that housing will play a major role in leading us out of the recovery. There is some room for auto sales to help out. Still, auto sales were so abysmally low last year that even vast improvement doesn’t give the economy enough boost to grow.

So where will the extra boost come from? The stimulus is one of the few sources available.

There are two questions, however:

1) Will it be enough

2) What are the long run costs.

I’ll answer in the next few posts.

 State level unemployment data for September is out and North Carolina held steady at a 10.8% level. This is slightly below the peak of 11.1% set back in May.

This remain the worst employment picture North Carolina has seen since we began keeping state level data in 1976

One of the issues that has concerned me most over the past 18 months is the possibility that the US will enter a deflationary spiral. A period in which prices are falling and the economy is semi-permanently depressed.

The actions of the Federal Government have reduced the probability of a semi-permanent spiral but the short run situations still doesn’t look so hot.

There are two basic ways of measuring inflation. First is what’s known as the Headline measure. It takes account of all the prices moving in the economy. The second is the Core measure. The core measure doesn’t count changes in food prices and in energy costs.

The Headline measure tells us what we are experiencing now but the Core tells us more about our future. Energy and Food are traded on commodity exchanges in Chicago and New York. Their prices changes every day.  Oil and corn prices can skyrocket and they can collapse and no one can tell you for sure where they will be tomorrow.

Over the last 12 months the price of oil has fallen dramatically. Thats what’s brought the Headline inflation measure deep into the negative. However, do we think that oil prices will keep failing? Almost certainly not. So that doesn’t tell us a lot about where we are headed.

On the other hand clothing prices, car prices and apartment rents only change a few times a year typically. And once they start changing they usually have a little inertia to them. An clothing store for example may mark up its clothes a little bit each season so that the consumer never faces a big one time shock.

The Core number, however, tells us that we are still trending downward. Core inflation has hit zero yet. That means that we still expect inflation to get better. However, its getting closer and closer.

This is a concern for local governments because tax revenues are tied to prices. The higher prices, the higher tax revenues. Unless inflation picks up the long term growth of sales tax revenue will be weaker than it otherwise could be. Local governments will be under more strain. Thus this is one of the numbers to watch to get a sense of how the future will unfold.