Вy the Numbers

The economy’s prospects look rather good.

U.S. President’s don’t

All presidents, whatever their confession or denomination, are closet numerologists. Numbers are how they read the mood and track the progress of the nation they govern. For George Bush, the numbers – rising casualty rates in Iraq, falling approval rating at home – have not been good of late. Hence he is turning with some enthusiasm to a happier set of figures: those tracking the American economy’s resilience and resurgence.

This week, he summoned his economic team to a meeting at his ranch in Crawford, Texas. Under a painting of a rodeo, they discussed an economy that is kicking strongly, but not bucking out of control. Output grew at an annual rate of 3.4% in the second quarter, a little slower than in the first. This was largely because firms chose to run down their inventories (subtracting 2.3 percentage points from growth) rather than making new stuff. With their shelves now depleted, companies are expecting to restock in the coming months and output is expected to rebound. Some analysts now forecast growth of 5% this quarter.

Momentum is gathering. Cars left the showrooms at a near-record rate in July (20.8m a year) and existing home sales reached all-time highs the month before (7.3m a year). Factories reported faster activity and fuller order books, especially for capital goods (up by 3.9% in June) that presage stronger investment. Even the federal government is doing well. So far this fiscal year, it has collected about $210 billion more in taxes than it had by this time last year.

Best of all, hiring is steady and sure. Employers added 207,000 workers to their payrolls in July, and 42,000 more than previously thought in May and June. They have hired about 200,000 workers a month on average since the end of January – not spectacular by the standards of the 1990s, but a marked improvement on Mr. Bush’s first term.

The Federal Reserve has digested the same numbers as Mr. Bush and reached a similar conclusion. There is much to welcome and little to fear in the economy’s current progress. This week, as widely expected, it raised interest rates by a quarter point.

Unlike central bankers and presidents, the public at large sets little store by numbers. Only a fifth of those polled recently by CBS News thought the country’s economic fortunes were improving, whatever the statisticians might tell them. More than half disapproved of Mr Bush’s handling of the economy.

What explains their skepticism? In Mr. Bush’s first term he was dogged by the question: Where are the jobs? Now the question is: Where are the pay rises? Workers’ total compensation grew strongly for the three quarters that began in July of last year – strongly enough to alarm some of inflation hawks at the Fed. But these gains were probably not very widespread, confined to those lucky employees who collected juicy bonuses or cashed in their stock options. Last quarter, according to figures released on August 9^th, compensation actually fell, in real terms.

Indeed, the picture is worse for workers than these figures imply. Not all of an employee’s compensation ends up in his pay packet. Much of it goes in the form of benefits, such as employer contributions to health insurance or pensions. According to the Bureau of Labour Statistics, the cost of such benefits accounted for almost 60% of the gains in compensation enjoyed by private-sector workers in the first quarter of the year, and nearly 35% of the gains in the second. By the bureau‘s reckoning, wages and salaries proper grew by only 2.4% in the year to June, slower than the rate of inflation.

Despite these meager pay gains, households are eager to spend whatever they get. In June, they earned just over $9 trillion (at an annual rate) in disposable income. They duly disposed of all but $1.9 billion (0.02%) of it. Households save so little of what they earn because they gain so much from what they already own. In the 12 months to March the value of their houses rose by $2.3 trillion, according to the Fed. Home prices rose by almost 15% in the year to June, the fastest in decades.

Can these gains continue? One simply cannot know for sure. Even if a bubble in the housing market does exist, the Fed believes it should do little about it.

As for Mr. Bush, he still has more than three years to achieve his goal of reforming taxes. But before he can hope to transform the American economy, he must hope the economy’s good numbers transform his own flagging ones.

The Economist August 2005.

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