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It’s a strange moment for the economy. Just when it is picking up speed, the risks of another slowdown are also increasing.
On the positive side, exports and consumer spending are up, and the job market finally seems to be improving. If anything, last week’s jobs report probably undercounted recent gains. That often happens early in an economic recovery because the Labor Department has a hard time keeping track of newly started businesses.
On the negative side, oil prices have risen more than 40 percent since September, and every level of government is considering spending cuts and layoffs.
All in all, the situation is uncomfortably reminiscent of last spring. Back then, companies were just starting to hire again, before a combination of events — including Europe’s debt crisis and the fading of the stimulus program here — spooked them and cut short the recovery. It’s easy to imagine how energy costs and government cuts could do the same this year.
But no branch of the federal government seems to be taking these risks seriously enough. At the Federal Reserve, some top officials still argue that the economy is at risk of overheating, even though they have been wrong on this point for months and still don’t have much data on their side. These officials remain in the minority, but they can make it harder for Ben Bernanke, the Fed chairman, to take action if the economy does weaken again.
The Obama administration, for its part, seems confident a true recovery is under way — much as it was confident a year ago, to its detriment. And Congressional Republicans are eager to cut federal spending as quickly as possible even if the cuts mean the layoff of government workers. “So be it,” as John Boehner, the House speaker, said last month.
I understand that Republican leaders honestly believe that spending cuts will help the private sector recover. Over the long term, they’re right that much of government needs to become more efficient. I’d just implore them to look at the evidence about the short-term effect of cuts.
Interest rates on corporate borrowing remain historically low, so there is no reason to think today’s government borrowing is making it harder for companies to borrow. The countries that have tried austerity (England and Germany) are struggling, while the leaders of the country that enacted the most aggressive postcrisis stimulus (China) talk proudly of its success.
Perhaps most persuasively, the people who get paid to make economic predictions say that federal cutbacks would harm the economy this year and next. The research firm Macroeconomic Advisers estimates that the House Republicans’ budget would raise the unemployment rate by 0.3 percentage points — which means about 500,000 lost jobs — by the end of next year. Economists on Wall Street, which isn’t exactly thrilled with the Obama administration, have made similar forecasts.
Nigel Gault, chief United States economist at IHS Global Insight, puts it this way: “I wouldn’t be cutting spending over the rest of the fiscal year, because the economy still needs support.”
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If policy makers wanted to reduce the current risks, they could consider at least four steps.
First, the Fed could respond to any major new sign of weakness by suggesting that it was ready to extend its current bond-buying program beyond June. That program — a second round of quantitative easing, known as QE2 — has been at least moderately successful. It has brought down some interest rates and made investors more willing to lend to riskier corporate borrowers.
Critics of QE2 correctly say that it, along with rising oil and food prices, could set off a self-reinforcing cycle of rising wages and prices. But so far, there is no sign of those risks coming to pass.
The bigger potential problem, by far, is another short-circuited recovery. “Certainly, Friday’s jobs report was encouraging,” Dennis Lockhart, president of the Atlanta Fed, said on Monday. “But, in my opinion, it is premature to declare a jobs recovery firmly established.” The events in the Mideast and North Africa, he added, have increased the economic risks.
The second step would be for the White House: developing a plan to open the Strategic Petroleum Reserve if oil prices don’t fall soon.
It’s too soon to open the reserve now, because energy analysts expect the conflict in Libya to have a fleeting effect on prices. If they’re wrong, though, the reserve would be able to help bring down the cost of oil for several weeks or months, which could be crucial to consumer spending. The whole point of the reserve is to help cope with temporary supply problems.
Third, the Obama administration could do more to reduce home foreclosures. Previous attempts have had their problems, but officials do seem willing to learn from experience. On Monday, the Justice Department held a conference on how federal and state regulators could nudge lenders and homeowners into mediation, which has the potential to reduce foreclosures. Programs in Florida and Philadelphia have already had some success doing so, notes Sarah Rosen Wartell of the Center for American Progress.
Finally, the administration could make clear that it is willing to play hardball on cuts to this year’s budget. Thus far, Republicans have had most of the passion, with new members of Congress saying they’re willing to risk a government shutdown to stay true to Tea Party principles.
But the White House has just as much reason to hang tough. If the economy weakens again this year, it will dominate the 2012 campaign — and not in ways that will help President Obama or Congressional Democrats.
Think back to late last year, when Mr. Obama and Congressional leaders agreed to a tax cut package that caused economists to upgrade their recovery forecasts. Mark Zandi of Moody’s Analytics raised his forecast for 2011 economic growth by 0.9 percent, which translated into roughly 900,000 additional jobs. Unfortunately, he has since cut that projected increase almost in half, thanks to oil prices and specter of bigger-than-expected government cutbacks.
The long history of financial crises shows that they do enormous damage. An economy typically does not even begin to recover for several years. Our economy has made enough progress that recovery still looks like the most likely outcome this year. But until the recovery is all but undeniable, we should assume that it is in doubt.
E-mail: leonhardt@nytimes.com; twitter.com/DLeonhardt
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