Glimmers of economic non-despair

By Dave Anderson:

We have stopped digging the hole that we are in and can start figuring out how to get out of it. That is the take-away from a few economic reports and analysises released this week.

First from the Federal Open Market Committee's statement on the economy.

Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

In non-Fed-speak, the Fed thinks we have hit bottom and cliff-diving is over. There may still be some declines in consumer spending (to be expected as the savings rate increases) and we should anticipate an inventory bounce soon.

Next Alan Blinder looks at the impact of the stimulus on 2nd quarter growth and its probable impact on 3rd quarter growth (h/t Brad DeLong):

The advance estimate of second-quarter GDP growth came in at negative 1 percent... a huge improvement over the disastrous first quarter (negative 6.4 percent growth) and the two quarters before that. Using the aforementioned estimates, fiscal stimulus accounted for about half of the improvement from the first quarter to the second. We are now in the third quarter, when the importance of the stimulus is likely to be even greater. In fact, its estimated growth impact (about 3 percentage points) actually exceeds the consensus forecast for third-quarter growth -- meaning that, according to current expert opinion, the stimulus will account for more than 100 percent of GDP growth this quarter

RGE Monitor offers an intriguing argument about vert high 2nd quarter productivity growth and the potential for an employment snap-back:

Why is this important? Well, it means that firms have fired at a rate inconsistent with previous cycles - much faster, in fact. Brad DeLong suggests that firms are not "hoarding labor" and predicts a jobless recovery due to the fact that the historical relationship between output and job loss is diverging from that seen in previous recessions. It seems to me, though, that firms fired at record rates; and therefore, they may hire at lightening speed as well. Robert Waldmann at Angry Bear suggests the same.

I am not sure if I buy this argument (businesses over-reacted to short term pressures and incurred high realized costs of firing as well as the loss of valuable human capital), but it is an interesting argument.