The Central Economic Problem

Not a surprise, although hearing it from the WSJ is, a little…

Can it be a surprise that demand, or rather the lack of it, is the problem in the midst of a balance sheet recession? Hardly. Households are suffering from high debt, low employment and low house prices, and are repairing their balance sheets. Despite banks sitting on trillions of reserves (in part due to the QE policies), consumer credit is down significantly:

Dearth of Demand Seen Behind Weak Hiring

The main reason U.S. companies are reluctant to step up hiring is scant demand, rather than uncertainty over government policies, according to a majority of economists in a new Wall Street Journal survey.

“There is no demand,” said Paul Ashworth of Capital Economics. “Businesses aren’t confident enough, and the longer this goes on the harder it is to convince them that they should be.”

In the survey, conducted July 8-13 and released Monday, 53 economists—not all of whom answer every question—were asked the main reason employers aren’t hiring more readily. Of the 51 who responded to the question, 31 cited lack of demand (65%) and 14 (27%) cited uncertainty about government policy. The others said hiring overseas was more appealing.

Some executives echoed the survey’s central finding.

“We’re hiring a little here and there—but it’s not what it should be,” said Daniel Cunningham, chief executive of Long-Stanton Manufacturing Co., of Hamilton, Ohio. “And it’s because of the lack of demand.” Long-Stanton, which makes metal parts for the aerospace, medical and other industries, has snapped back from the recession, “but volume is still not up to where it was, or where it should be,” Mr. Cunningham said. Long-Stanton is privately held and has 75 employees.

Mr. Cunningham said part of what makes him hesitant is the extreme volatility he sees—with business up one month, then down the next. “Instead of good years, it’s like you have a good month—or a good three months,” he says, adding that this makes it difficult for him to feel confident of steady demand.

Among economists who see uncertainty as the primary obstacle to hiring is Sean M. Snaith of the University of Central Florida. “The black cloud of policy uncertainty still hangs over the private sector,” Mr. Snaith said. Republicans and the economists who advise them have been emphasizing the damaging effects of uncertainty on the strength of the economic recovery; Democrats and the economists who advise them tend to point to the weakness of demand, instead.

Overall, the economists in the Journal survey dimmed their outlooks for economic growth and for two critical gears of the stop-and-go recovery that have yet to engage: housing and jobs.

The economists have grown gloomier about the second half of the year, and marked down their forecasts from earlier ones. Nevertheless, they still expect the economy to rebound in coming months and perform better than in the disappointing first half.

Gross domestic product grew just 1.9% in the first quarter at a seasonally adjusted annual rate. Economists in the poll expect second-quarter GDP growth—a figure due this month—to remain at 1.9%.

Economists ratcheted down their growth forecasts for both 2011and 2012 from previous months, to a pace insufficient to tame the unemployment rate, now 9.2%.

Growth is seen picking up to an annual rate of nearly 3%, on average, for the second half and next year, following the fallout from supply-chain disruptions due to the Japanese tsunami and earthquake and a spike in oil prices tied to Mideast unrest. A rebound in the auto sector, which was hard hit by the disasters in Japan, “could boost economic growth by 1.0 to 1.5 percentage points during the third quarter,” said Sung Won Sohn of California State University.

Economists expect home prices, as reflected in the Federal Housing Finance Agency index, to drop 2.4% for all of 2011 and forecast that housing starts will tick up through 2012 but remain at historically depressed levels.

The jobless rate will start declining again slowly, the economists predicted, but the average forecast puts December 2012 unemployment above 8%. They expect the U.S. to add about 170,000 jobs a month over the next 12 months. So far this year the average monthly jobs gain is 126,000, but was as high as 179,000 before the two most recent disappointing reports. The economy needs at least 100,000 new jobs every month just to keep up with population growth.

Reaching that level of job creation will be difficult unless businesses feel more confident and start hiring. The debate over whether to kindle that confidence by stimulating demand or clarifying government’s direction reflects the political divide, with many Democrats arguing that a lack of demand can be offset by fiscal stimulus, while Republicans counter that concerns about uncertainty are a signal that government needs to step back.

A recent survey by the National Federation of Independent Business indicates that concerns about demand remain a major obstacle to growth and hiring. When asked the single most important problem facing their businesses, 24% cited “poor sales”—a percentage that remains above highs seen in the recessions of the 1990s and early 2000s.

The case that uncertainty—among consumers as well as businesses—is restraining the economic recovery got a nod from Federal Reserve Chairman Ben Bernanke last week, who said during congressional testimony, “There’s certainly uncertainty about regulation… but there’s also uncertainty about whether this is a durable recovery. People don’t know whether to invest or to hire because they don’t know … whether the recovery is going to continue. So I think part of what we can do—obviously, we want to address the regulatory, trade, tax environment, [and] absolutely [the] fiscal environment. We also want to do whatever we can to make the economy grow faster and make people more confident.”

Despite their forecasts for slow growth and an elevated unemployment rate, the economists aren’t in favor of further action either by the Fed or the federal government. Forty-one economists in the WSJ survey said the central bank shouldn’t pursue another round of bond-buying aimed at reducing interest rates, and thirty-eight said another round of fiscal stimulus shouldn’t be a part of any deficit-reduction package.

Economists added that they hope that as conditions begin to improve, albeit slowly, consumers will become more optimistic. “For whatever reasons, in addition to discrete headwinds, I think we’ve taken a hit to animal spirits and as those headwinds fade sentiment will revive,” said Stephen Stanley of Pierpont Securities. “Optimism can be self-sustaining, but pessimism can also provide a persistent drag.”

—Timothy Aeppel contributed to this article.

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