Economic Notes: Briar Patch Syndrome
8/25/2011
By Patrick J. O'Keefe, Director of Economic Research, J.H. Cohn
Briar patch definition: an area covered by a thick, dense tangle of thorny plants.
Briar patch navigation: the longest distance between two points.
When the economy slowed earlier this year, the conventional explanation was that it was due to temporary disruptions (e.g., Japan’s catastrophes, “Arab Spring,” bad weather). As a result, the economy had entered a “soft patch”—but growth was expected to accelerate in the third quarter.
Yet now in the third quarter, the soft patch seems more a briar patch with entanglements that impede progress, sometimes to the point of arresting or reversing it.
Recent data—together with downward revisions of previous estimates—have prompted most forecasters to reduce significantly their projections of future growth. The Federal Reserve, for example, characterized the economy as “considerably slower” than expected and forecast a “somewhat slower pace of recovery over the coming quarters.”
Although the Fed does not anticipate another recession, others do while even others contend that the 2008-2009 recession has yet to end.
The view here remains (see “Managing Expectations”) that the U.S. economy is not experiencing a cyclical recovery, but rather is in the midst of a longer-term realignment. And, therefore, it faces a slow-growth trajectory, with occasional retrenchments, for a number of years.
In other words, we do not expect the economy to slump, but rather to slouch and stagger through the briar patch.
A caveat: This outlook assumes relatively stable credit markets. While the recent volatility in the financial markets has been stressful for investors and institutions alike, evidence of systemic stress—which would impact the general economy—has been relatively restrained in advance indicators such as the LIBOR-OIS spread. But as the chart’s inset reminds, conditions can change quickly.
As mentioned earlier, revised GDP data—the total output of goods and services—show that the 2008-2009 downturn was deeper and the recovery slower than previously estimated. While the initial estimates may have been consonant with the run on Wall Street, the revised data are more in line with the experience on Main Street.
Indeed, where the initial estimates had real GDP exceeding the pre-recession peak by the end of 2010 (i.e., the economy had moved from recovery to expansion in 2010’s fourth quarter), the revised data indicate that it had yet to do so six months later, in mid-2011.
This is an illustration of the briar patch syndrome (“BPS”), a condition in which the economy, despite moving forward, is behind where it was and, cet. par., less than it would have been.
The revised GDP data presents a picture more consistent with the jobs recovery, which began when private sector employment started expanding in March 2010. (The underlying trend was partially obscured by a temporary spike in Federal jobs related to the decennial census.)
On the recovery’s second anniversary in July, total employment was equivalent to where it stood at the beginning of the century. There were 6.8 million (4.9%) fewer jobs than when the downturn began. And the employment rate—the proportion of work-eligible individuals with jobs—was at a 28-year low, suggesting that the economy’s jobs deficit affects almost 12 million prospective workers.
Nevertheless, a key measure of the well-being of households, real per capita after-tax income—that is, total disposable income adjusted for inflation and population growth – is up from its recession low.
But the BPS is inescapable: While real incomes are off the bottom, they remain more than three percent below the mid-2008 peak due largely to the impact of the jobs deficit. Worker earnings are equivalent to the March 2008 peak, but when adjusted for inflation are 4.7% less.
Despite stagnant earnings, household incomes have increased due to gains in other sources of income (e.g., investment earnings, income transfers) and tax cuts. Further, households have reduced their financial obligations (i.e., monthly mortgage and credit card payments), which released funds for spending and saving.
These gains have, in turn, supported higher consumer spending, which has more than fully recovered even when adjusted for inflation.
It is probable, however, that after-tax incomes and, therefore, consumer spending will flatten in the coming months—unless jobs growth accelerates. It would be yet another demonstration of the BPS, in this instance owing to the gradual decline in fiscal stimulus as we approach year’s end.
And while job growth is expected to continue, the pace will likely slow—rather than accelerate—from already subdued levels.
As noted above, the jobs recovery has occurred entirely in the private sector.
A closer reading of the employment data, however, indicates that within the private sector those gains have been highly concentrated. In 2011 through July, over one-half (55.0%) of the total private sector increase was attributable to four industries (viz., manufacturing, healthcare, leisure/hospitality, and retail).
Manufacturing employment, the largest contributor among the big-four, may be losing momentum (slowing, not stalling), with new orders flattening and inventories exceeding the pre-recession peak.
The other engines of expansion should continue to add jobs, but neither they nor other industries are poised to accelerate. Since fiscal constraints will cause the public sector to shrink, job growth will remain tepid for some time to come.
In sum, the data revisions confirmed reality as it was understood by the business sector (except, perhaps, investors); and the reality of the new data prompted adjustments to previously optimistic forecasts.
What hasn’t changed is the reality itself: in the aftermath of the 2007-2009 retrocession, the U.S. economy is in the midst of a long-term realignment – a.k.a., the briar patch syndrome.
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The statements, opinions, and conclusions contained herein are based solely upon the author’s own studies, research, and personal experience. Neither J.H. Cohn LLP nor the author makes any representation or warranty as to the accuracy or completeness of this information. J.H. Cohn LLP and the author expressly disclaim any liability for any loss or damage which may be incurred, of any kind whatsoever, as a result of or arising from the use of any of the information contained herein or reliance on the accuracy or completeness of it.
Patrick J. O’Keefe is director of economic research at J.H. Cohn. He can be reached at pokeefe@jhcohn.com or 1-877-704-3500.
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