South By North Strategies, Ltd.

Bad Budget News

Much of the discussion about the Obama administration’s Fiscal Year 2011 budget proposal has ignored the troubling economic assumptions upon which it is based.

Reports The Economist:

OMB head Peter Orszag is giving a press conference just now with Christina Romer, head of the Council of Economic Advisors, on the president’s Fiscal Year 2011 budget. Ms Romer explained the economic assumptions underlining the budget forecasts. She noted that expected fourth quarter-over-fourth quarter real GDP growth would be 3% in 2010, 4.3% in 2011 and 2012, and would average 3.8% in the five years thereafter. These figures are in line with Fed projections.
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She then gave the unemployment forecast. At the end of 2010, the unemployment rate, according to the administration’s forecast, will be 9.8%. At the end of 2011, the rate will be at 8.9%. And at the end of 2012, after the next presidential election, the unemployment rate will be 7.9%.

Paul Krugman, meanwhile, explains what the administration proposes to do about this:

So what’s the response to this dismal, family-destroying prospect? A brief, small additional stimulus, followed by a spending freeze. In essence, the administration is accepting mass unemployment as just one of those things we have to live with.
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Now, we all know that this mainly reflects political constraints; this isn’t an Obama-bashing post. But think about how sick our political system is, if this is the best we can do. Nobody — not the Fed, not the administration, not Congress, is willing to do anything to create jobs despite dire projections.
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What we’re witnessing is an awesome national failure.

Around the Dial – Feb. 1

Economic policy reports, blog postings, and media stories of interest:

• Paul Volcker proposes how to reform the financial system.
• Simon Johnson wonders about the misuse of the word “populism.”
• The New Yorker profiles Secretary of Education Arne Duncan.
• The Economist analyzes the new GDP numbers.
• The Winston-Salem Journal rounds up local employment numbers.

Economic Conditions in Greensboro, NC

A new UNC-Greensboro study of  the city’s economy finds conditions to be “less than robust.” From the executive summary:

Greensboro continued to slip even further behind its peer city group especially with respect to below average wage rates and lagging job generation rates in key sectors of the economy (such as professional/scientific/management and various education and health services.) Much of the data included in this report is based on 2008, and as Greensboro began to feel the brunt of the late 2008 economic downturn it appeared it was impacted disproportionately relative to the peer city group.
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Greensboro’s population growth rates (8.0%) continued to lag behind in-state competitors, especially Raleigh (14.4%), Charlotte (12.5%), and even Winston-Salem (12.3%). It seems Greensboro still remains a “goldilocks” economy that is neither too hot nor too cold but instead remained slightly below average on most major metrics.
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Greensboro has experienced significant manufacturing job losses in recent years, and it no longer has a disproportionately large relative share of its labor force employed in manufacturing …. That said, Greensboro has the highest proportion of its labor force employed in retail relative to the peer group – a potential cause for concern given the low wages typically offered in retail.

4th Quarter GDP Growth

Advance estimates from the U.S. Bureau of Economic analysis show that real gross domestic produce (GDP) grew at a 5.7 percent annual rate between October and December 2009.  This is the second consecutive quarter of GDP growth.

Real GDP is driven by four broad factors: personal consumption expenditures (PCE), gross private domestic investment, net exports, and government spending in investment.

Last quarter,  gross private domestic investment — particularly inventory adjustments — was the main driver to GDP, adding 3.8 percentage points to the quarterly change. More specifically, changes in private inventories contributed 3.4 percentage points to to the quarterly change in real GDP. The other major contributor to quarterly growth was PCE, which added 1.4 percentage points to the quarterly change. Positive changes in net exports contributed slightly to quarterly growth, and changes in government spending subtracted slightly from quarterly growth.

Many observers will look at the positive GDP report — which is subject to two further revisions — and claim that the recession has ended. This is misleading. Although positive GDP growth is welcome news, it is unclear if this path is sustainable. Much of the change was driven by what appears to be a one-time change in inventory levels. Additionally, the 4th quarter results were still heavily influenced by federal recovery spending, such as depreciation bonuses for businesses and the homebuyers tax credit (originally slated to expire at the end of November).

Now that public supports and other elements of the recovery package are phasing out, it is unclear whether the economy will be able to maintain robust real GDP growth on its own. High levels of unemployment suggest that PCE will contract while weaknesses in residential and nonresidential real estate likely will retard activity in those areas.  And the expiration of federal aid to the states and weak revenue collections likely will restrain state and local government spending.

Unemployment Insurance Solvency

The current issue of Triangle Business Journal contains an overview of the issues related to the Employment Security Commission of North Carolina’s borrowing from the federal government to pay unemployment insurance benefits. Once conditions stabilize, steps will need to be taken to rebuild system solvency, and tax matters will come into play. On that topic, the article featured the perspective of South by North Strategies:

“At some point, it’ll have to go up. We’ll have to rebuild the solvency of the system,” says John Quinterno, who writes on public policy issues for Chapel Hill-based South by North Strategies. “This is one of those things you don’t have to deal with yet since you are getting the money to pay the benefits. On this one, credit the feds; they have kept things running.”