Joseph Carson is Senior Vice President and Director of Global Economic Research at Alliance Capital. Previously he was chief economist of the Americas for UBS Warburg after serving as chief US economist at Deutsche Bank Before that he held top posts at Dean Witter, Chemical Bank, Merrill Lynch, and General Motors.
Harlan Levy: What do the May jobs and other reports say about the U.S. economy?
Joseph Carson: Certainly the employment data on the surface is pretty weak and soft. Payroll job gains were very timid, only 69,000, including 80,000 private jobs. But the household survey numbers were a lot stronger - employment up 422,000. So you have two different pictures of what occurred in May. The emphasis is always on the payroll data, which shows a significant deceleration in job creation so far in the second quarter.
So you have a very confused outlook. To give you an idea, we had two measures of consumer confidence in May. One went up to the best level in five years, and one dropped.
Also, the consumption and manufacturing data for May were much stronger and a little bit better than expected.
The data is still preliminary. I was a little surprised by some of the adjustments that the Bureau of Labor Statistics made on the payroll data. The unadjusted jobs were 789,000, which is 140,000 better than last May, yet they only ended up showing 15,000 more on a seasonally adjusted basis. So they made a very large seasonal adjustment to the May payroll numbers, which is a little surprising to me, based on how long I've been doing this. Maybe that's why the payroll data and the household data disagree with each other a lot.
If the economy were weakening, you'd have seen it in the manufacturing data for sure. That report showed the strongest order number in a year. Inventory is down, and most of the comments from industries in that report were upbeat, all except the tech sector, which showed that sales were slowing in Q2 versus Q1.
H.L.: What's ahead for the U.S. economy?
J.C.: In the short run clearly I think the focus continues to be on Europe -- and what they're going to do to encourage Greece to go along with their adjustment program -- and also the banking situation. I think the most troubling thing in Europe right now is the lack of confidence in the banking system. One of the most important things to any banking system is confidence and safety in liquidity. So they have to do something to insure that the depositors feel that their money is safe and not trigger a flight from one bank or one nation to another.
The Greek election on June 17 is really important. The Greeks have to vote to stay in or move out of the euro zone. That would definitely be a plus if they vote to stay in.
Also, the fall in oil prices is very positive for the U.S. economy. It takes away a major headwind, although we have new headwinds coming from Europe and Asia. Some of our domestic industries - including motor vehicles, housing, and construction in general are better, but if they're going to be offset by weaker export growth, then we're still going to be muddling along at about 2.5 percent growth.
In the first quarter, export growth was actually running up to 7 percent, while we were only expecting 6 percent for the year. Even if you look at the purchasing managers survey for May, showing export order index dropped from 59 in April to 53.5, export growth may be slowing, but it's still positive going forward. And there doesn't seem like there'd be a dramatic drop-off in economic activity, based on what I've observed.
H.L.: How's the housing market in light of low interest rates but fewer mortgage applications?
J.C.: Most of the regional builder surveys we get show a more positive trend than we've seen in five or six years in terms of traffic, buying interest, starts, pricing. The underlying trends are a lot more upbeat than some of the data in a survey that shows a little bit of a pullback in mortgage applications. I don't think that survey is comprehensive.
H.L.: What must the eurozone countries do to extricate themselves out of their sovereign debt situation beside austerity?
J.C.: Austerity doesn't work. You can't get these economies to get out of their budget holes with no growth. What they need to do is a combination of things.
One, they need to stand up as a group and say that all the deposits throughout the European system are protected and insured. That will calm down the banking fears. And they probably need another interest rate cut by the central bank. And then they have to stretch out the timeline for when these countries have to meet their budget targets. The U.S. will take five to 10 years, and they want to do it in three to five. We're growing. They're not. I think they need to keep fiscal discipline in place but make it stretch out over a number of years.
H.L.: Can austerity without a revenue increase work in the U.S.?
J.C.: We need to have some modest tax increases over time, but they have to be less than half the size of the spending adjustments. If you look at our history, we never got more than a 19 percent revenue-to-Gross-Domestic-Product ratio, and most of our problem now is that the expenditures are 23, 24 percent. We probably have to put in place some type of tax increases that spread out over a five or 110-year period, but most of the adjustment has to be on the spending side.
H.L.: Should the Bush tax cuts be allowed to expire, at least the ones for the wealthy?
J.C.: In the short run they need to be extended, but any long-term tax reform should include some certainty on where tax rates are going to be in the next five to 10 years, not just in one or two. Certainty is needed for planning for both an individual and a corporate standpoint.
H.L.: What do you think of the stock market?
J.C.: I think if we get through this European situation, there are a lot of opportunities there.