Diane Swonk is a senior managing director and chief economist for Chicago-based Mesirow Financial. She is also a professor at DePaul University's MBA program, a past president of the National Association for Business Economics, and is on advisory committees to the Federal Reserve Board, its regional banks, and the White House Council of Economic Advisers.
H.L.: What’s the effect of the turmoil in Egypt and the Middle East?
D.S.: The turbulence in the Middle East illustrates how fragile the global situation is. There’s hope there, because if we do get a regime change that is less corrupt it could be very favorable to the U.S. But it also could tip the other way. We just don’t know yet.
The fact that it’s bid up commodity prices even further is not good. Higher commodity prices are not coming from demand in the U.S. They’re coming from factors outside of the U.S. They threaten demand in the U.S. They are a tax on U.S. consumers to make trade-offs. You’re seeing it in the middle-income strata, the fact that we had Black Friday sales that ran all the way from October into December to keep holiday spending afloat. It was really the high-end, the conspicuous spending coming back that brought back the holiday season, while the bulk of the market only shopped the sales, even as inventories were drained down and selection was taken away. We also saw spending on entertainment slow down, and spending at going out to eat slow down among the middle-income kinds of family restaurants, as prices at the pump went up.
Those trade-offs mean that inflation cannot just take off or be ignited by what’s happening. It’s more of a threat to the sustainability of the expansion
H.L.: What do you make of the January new-jobs data – 36,000, down from 121,000 in December?
D.S.: The data is not very accurate. The government looks like it’s severely undercutting data, and in fact the weather did play a very large role in distorting job gains. Some 886,000 workers did not make it to work the week the survey was taken because of inclement weather. So I think we need to take the data in the month of January with not only a grain of salt but a truckload of salt.
Also the payroll survey does not capture very well initially small business employment gains and new firms being created. We saw initial public offerings double in the fourth quarter from the prior year, and that means they reached a critical tipping point in hiring. They had a lot of cash, and they’re hiring now, and we’re missing some of the job gains that are coming.
That said, we are still not talking about numbers that are enough to dig into the deep level and the huge number of people who have been unemployed for a long period of time. Those people -- most notably construction workers who lost their jobs at the beginning of the crisis, 10 million-plus -- do not appear to be getting a job, as many people hoped. In healthcare, business services, engineering, or manufacturing where jobs are growing, the jobs are much more highly skilled. They are dropping out, as many people feared, and they are going to cause additional stresses on the economy, either applying for food stamps, as we’ve seen go up quite dramatically, adding to the ranks of poverty, which have increased quite dramatically, or adding to the ranks of the homeless.
So, as much as I think the labor market statistics are underreporting and not capturing that the labor market is healing more rapidly, we are currently seeing that it’s still not enough. As the tide comes in, it’s not coming in strong enough to lift all boats.
H.L.: When will job growth match population growth?
D.S.: I think we’re going to see some catch-up in the data this month. The bottom line is that as we get through these winter months and get into some kind of more reasonable weather pattern where we can have construction where you are supposed to have construction, all of that will start to show up in February, March, April, as well as some upward revisions as they capture some of the workers who really didn’t show up for work but should have been counted but didn’t in the payrolls.
But we’re looking at an economy that, even if it more than triples the employment gains of last year, you still get an economy where there’s going to be 4 million jobs in the hole from the recession. So you still have a long way to go to recoup the losses we’ve endured – four to five years is not that far out of the range.
H.L.: So what’s the status of the economy?
D.S.: We are at least three years into minimally a seven-year cycle. That’s four years away from getting back to anything near to be considered reasonable and normal. That’s a long hard slog, and it’s the residual of an economy that lost a good portion of its financial sector and just can’t finance things.
There are reasons for hope: The fact that we saw initial public offerings picking up against the backdrop of a stronger stock market, and we’re starting to see the seeds of new-firm development and eventual hiring, but the seeds are a long way from a tree being grown. We’ve moved from having pneumonia to bronchitis, which is more treatable, but we’re still not out of the hospital.
H.L.: What would happen if the Republicans in Congress refuse to let the debt ceiling rise in March?
D.S: The more seasoned Republicans who understand the pragmatism of putting a budget together in Washington have come back and said, “Wait a minute. It’s not that we’re not going to raise the debt limit, but we need to see some substantive changes in the budget.” And what they’ve done is they’ve lost their card a little bit, because the president gets his first cut at the budget and gets to say where cuts are going to come and where deficit reductions are going to come, and he’s already offered up changes in the corporate tax code that corporations and businesses are more amenable to.
The initial Republican position on this has backfired a bit, because, of course if you don’t let the debt ceiling rise, all of a sudden you’re insolvent. You could have a complete financial meltdown, with interest rates spiking and the world having to deal with the fact that the U.S. was technically in default on its debt. That’s not really a productive way to solve our problems.
Also, if you don’t let the debt ceiling grow, what the Republicans in Congress are trying to tell the newly elected Tea Partiers is that as a result the cuts that need to made and where the budget is cut are not our decisions. It’s the administration’s decision. And all of a sudden that yields their power to the administration over deciding what the priorities are for this nation. So we’re not going to see as much hostage-holding. There’s been a lot of backtracking on that, and there’s more reasonable voices that have come out.
The reality is that the only way we get to go where we need to is bipartisanship. It’s going to be moderation on both sides. It’s going to be finding a consensus on where the extremes of the two parties agree. Frankly, we do have a lot of overlap in this country. There was a major shift at the end of the year, and I think that shift will move forward, and there’s a good understanding that if we don’t let the debt ceiling be raised, there’s a bigger consequence. You don’t want to cut your nose off to spite your face and have the U.S. fall into insolvency or have a president whom you don’t agree with set the priorities.