At first glance, the economy seems primed for a speedy revival from recession.
Since the beginning of the year, the Federal Reserve has slashed short-term interest rates more aggressively than ever before. Oil prices have fallen to under US$20 a barrel. The stock market has rebounded, companies have slimmed down their bulging warehouses, and consumers can look forward to lower tax rates next year.
So it's clear sailing ahead, right? Not necessarily. As it turns out, some of these signs are not as favorable as they sound, and lurking behind them are financial imbalances that threaten to retard the recovery.
Indeed, while many on Wall Street are counting on a solid rebound next year, Main Street is still looking for signs of improvement. Take Rodney McMullen, an executive vice-president atKroger, the nation's biggest grocer-retailer. He said purchases of discretionary items, like flowers and jewelry, had stopped sliding but showed no hint of a revival. Because those items aren't necessities, their sales tend to be the most sensitive to buyers' finances.
Consumers, it appears, have not felt the full impact of all those supposedly positive factors.
For starters, the deterioration of the federal budget outlook may have neutralized much of the Fed's rate-cutting. "On net, those two wash out," said David Romer, an economist at the University of California at Berkeley.
The cushy surpluses once projected for the next few years have virtually disappeared, thanks to income-tax cuts, depressed tax revenues and billions in unexpected spending on disaster relief, domestic security and the war in Afghanistan. If the government issues more debt to pay for these things, businesses will have to offer higher interest rates to compete for investors' financing.
"Long-term rates have not fallen, even though short-term rates have come way down," Romer said. In past recessions, the two have tracked more closely. This time long-term rates took a while to respond, then fell, but have since begun to climb again. Since the Fed began cutting rates in January, its key short-term rate has fallen from 6.5 percent to 1.75 percent. Meanwhile, 10-year bond yields, which closed at 5.08 percent on Friday, are little changed from January levels. Long-term interest rates generally have to fall to convince businesses to ramp up investments.
That is not to say that the Fed's actions had no effect. "Monetary policy is a powerful tool, and that's still true," Romer said. "If we hadn't had the monetary policy, long-term rates might be a lot higher than they are."
Cheaper oil may also offer a disappointingly small jolt to the economy. "Certainly it's good news," said James Hamilton, an economist at the University of California in San Diego. But he warned that oil prices' capacity to spur growth has little to do with how much they have apparently stifled it in the past. "Oil prices have much more potential to disrupt the economy when they go bad," he said.
An even deeper problem for the economy, however, could arise as businesses and households come to grips with their balance sheets.
"Businesses are not wanting to take on some more debt even though the rates are lower, unless they're refinancing something they already have," said Patricia Marquez, a business banker at Wells Fargo in El Paso, Texas.
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