Let’s start with some of the better news. The U.S. housing market appears to have bottomed and has even begun to rebound in some markets. Within a few days of each other, I heard from realtors in Sacramento, CA and an upscale New Jersey suburb that they had no moderately priced homes to sell in their markets. Purchasing manager surveys tell us that although manufacturing is hovering at the cusp of expansion and contraction, we’re on track to sell over 14 million cars this year. Energy is much more affordable than we feared at the beginning of 2012 and more of it is being produced domestically.
There appear to be fewer layoffs despite the fact that job growth remains disappointing. Weekly reports of new unemployment claims have bounced around recently, but for a favorable reason—auto manufacturers have delayed or reduced their normal mid-summer furloughs in order to maintain dealer inventories. That shift confuses the statisticians, but it means more workers on the job and more paychecks being issued. Moribund personal income levels have even increased a bit.
Slow growth is what you’d expect in the years following a financial crisis of the magnitude of the 2007 – 08 debacle, but even the deleveraging that resulted is showing signs of abating. The ratio of household debt to personal disposable income has declined to 105%, down from about 130% at the bubble’s extreme. And because of that reduction and low interest rates, household debt service is relatively low. We’re still not back to a fully functional credit system, but things are better.
So is there a problem? Can this grudging growth begin to accelerate? The answer, of course, depends on Washington. As year end and the fiscal cliff get closer by the day, the uncertainty about taxes and spending becomes more telling, and risk taking becomes even riskier. Should I expand my business? First tell me how much you’re going to tax the higher profits I hope to generate and how much my new employees’ benefit package will cost.
We’ve never expected to get much clarity on these issues when an approaching election means that each compromise will have a cost in votes and campaign contributions. But I believe what makes today’s situation even worse is the talk that a significant number of Congressional representatives want to go over the fiscal cliff so that they can claim credit that “I cut your taxes, restored your benefits and put things back together again.” Crazy? Hey, we voted them into office.
Two things have recently happened, however, to give me a little hope that reason may prevail. First, the Senate passed a tax bill (which will never become law) along party lines, in which the Democratic majority voted to tax dividends at 20% rather than at the much higher ordinary income tax rate they had been advocating. And second, the House Republican leadership has agreed to legislation allowing government agencies to continue spending in fiscal 2013 what they spent in fiscal 2012. In so doing, they overruled their own party members who wanted big and immediate cuts in many of those agencies.
I’m not saying that either of these legislative moves gives us the best possible policy, but it does suggest that some leaders on both sides have begun to recognize the dangers of remaining rigid on their most extreme stands. Getting some things we like at the cost of getting other things we hate is the price of progress in a republic. I can only hope that in some unmarked room in the Capital building, a group of congressional staffers are hammering out a solution to prevent going over the fiscal cliff. I may not like everything they produce, but I hope they produce something. If they don’t, the old Beatles song’s claim that “it can’t get no worse,” could well prove to be wrong.