The G8 finance ministers met over the weekend, and after agreeing that the world economies are still stuck “in the middle of the worst crisis since the Great Depression” felt that there’s no time like the present to plan for the unwinding of all the steps so far preventing another Great Depression. This cognitive dissonance is also apparent on Capitol Hill, where the opposition party asserts the failure of the Obama stimulus package barely four months after its passage, and where some Democrats and Republicans in Congress are seeking to strip the Federal Reserve Board of the supposedly dangerous and expanding powers that the governors used to prevent the U.S. economy from falling off the cliff – while many in the Beltway fiddled.
The June 13 meeting of the G8 ministers yielded something called the Lecce Framework, filled with rousing yet amorphous language similar to previous statements of alarm and resolve. The resulting “strategy” ostensibly would “create a comprehensive framework, building on existing initiatives, to identify and fill regulatory gaps and foster the broad international consensus needed for rapid implementation.” Given the well-reported lack of international consensus on this topic, it might be best to leave the stopwatch in the drawer.
Despite all their tut-tut-ing about the weakness in their own economies and plans to “continue to implement” job creation plans, the ministers have “asked the International Monetary Fund to do the necessary analytical work to help governments prepare exit strategies to unwind the huge stimulus packages used to stabilize the economic situation, according to the IMF.
This request came just three days after the IMF released its most recent forecast for 2009, which suggests some green shoots in the U.S. but a “sharp contraction in advanced Europe” and shows Eastern Europe falling into “deep crisis.” The fund predicts recovery could be delayed “especially if policymakers do not address problems in the financial sector head on.” Now IMF staffers will draft an exit strategy for stimulus efforts.
At least Treasury secretary Timothy Geithner acknowledged that the “encouraging signs of stabilization” have been nurtured by the “unprecedented scope and intensity of policy actions to support demand and financial repair.” His formal statement at the G8 confab also cautioned that the “global economy is still operating well below potential, and we still face acute challenges.”
Recent data make a rather unconvincing case for all the talk about the signs of stability and/or recovery in the U.S. economy. The Fed’s beige book, released on June 10, notes that “manufacturing activity declined or remained at a low level” though most of the country through May, though several Fed districts said that the “outlook by manufacturer has improved somewhat.” Similarly, despite weak labor conditions some districts report signs that “job losses may be improving.” Most prices—excepting oil—were flat or falling. The report is hardly a ringing endorsement of prospective recovery.
And a recent “Economic Letter” from the Federal Reserve Bank of San Francisco argues that labor market indicators could foreshadow a listless rebound. “Specifically, we suggest that the relatively low level of temporary layoffs and a high level of involuntary part-time workers make a jobless recovery similar to the one experienced in 1992 a plausible scenario,” the FRBSF economists write.
The RBC CASH Index, which measures U.S. consumer confidence eroded 8.7 points in June, slipping to 34.7 point from 43 points in May. But the index remained well above the 1.6-point nadir set back in February. The RBC Expectations Index rose for the first time in four months in June, moving up 6.9 points to 40.9 from 34 points in May.
