As economy lags, what levers to pull?
Pressure is mounting for the US government to act soon to prevent a recession.
from the January 7, 2008 edition
Page 2 of 3
"One shouldn't overreact to today's numbers. They are one-month numbers and they may get revised," says Alice Rivlin, a Brookings Institution scholar who served as President Clinton's budget director and then as a Fed official during the 1990s. Still, she says the signs of a slowdown in job creation "make it more likely that we are headed into a very slow growth period or maybe even recession."
Even a period of slow growth could be tough for America. Forecasters sometimes use the term "growth recession," referring to periods when the pace of growth fails to keep up with the size of the labor force.
Such a period may have arrived.
In the Labor Department's new report, the agency's survey of employers found that the economy generated just 18,000 jobs in December. And for the private sector (leaving out government jobs), the job-creation tally was negative: Some 13,000 jobs were lost last month.
After a meeting with policy advisers Friday, Bush called the economy "solid," but said "there are signs that cause us to be ever more diligent in making sure good policies come out of Washington."
The job numbers are just one of the signs. High oil prices, tighter lending standards by banks, and declining home prices are additional forces that weigh on consumers. That, in turn, dampens the desire of businesses to expand operations.
Part of the pressure on Bush is political. Historically, a bad economy in an election year tends to hurt the party that controls the White House.
Beyond that, policymakers of all stripes have an interest in keeping the economy as strong as possible. The question, as always, is how to do it.
Talk of fiscal stimulus has grown louder in recent days.
One reason is that so far, policy efforts to contain the housing slump have had only limited success.
Similarly, the Fed can only do so much.
At a time when banks are wary of lending and businesses are wary of investing, interest-rate cuts may be relatively ineffective. Moreover, if monetary policy gets too easy, inflation could pick up – creating a new problem rather than solving one.
Still, Wall Street traders now expect the Fed to cut rates again this month, perhaps by as much as half a percentage point. Investors signaled their worry about the job market Friday by pushing the Dow Jones Industrial Average below 13000.
Prominent economists on both left and right – including conservative Martin Feldstein and former Clinton official Lawrence Summers – now say the risk of recession warrants some fiscal stimulus.
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