‘Definite Signs’ Of Mass. Economy Bottoming Out

BOSTON — There are signs the Massachusetts economy may be on the rebound. Analysts point to a large drop in new unemployment claims, rising auto sales, a 10 percent jump in home sales in June and increasing consumer confidence.

At the same time, though, analysts say the recovery is only in its early stages and that unemployment will yet rise.

Cathy Minehan, former head of the Federal Reserve Bank in Boston and now chair of the Governor’s Council of Economic Advisers, joined us to discuss.

Bob Oakes: Do you view these signs as positive signs that maybe the economy is starting to rebound?

Cathy Minehan (AP)

Cathy Minehan: I definitely look at them as positive signs. I do not think the rebound is going to be really fast or really strong, but it’s certainly better than continuing to decline.

When you look at the data that you mentioned in your introduction, when you look at the leading index that’s prepared by Alan Clayton-Matthews at the University of Massachusetts in Boston, when you look at the data for Massachusetts, when you look at leading indicators, when you look at the data for the national economy, you see either a diminution in the rate of decline or you see things actually starting to turn around.

Particularly the prices of homes in certain places, a reduction in the claims for unemployment, you mentioned consumer confidence. So things are starting to pick up, but it’s going to be a slow, slow recovery from anything that we are able to see.

When you say slow recovery, what do you mean?

Well, think about the things that usually pull us out of an economic decline. They all have to do with consumer spending, usually. The consumer after a long period has some pent up demand, they start to get a feeling about confidence, and they jump back into housing markets and car markets and other kinds of spending, and that kind of starts the economy moving again.

The nature of this economic downturn has a lot to do with the de-leveraging of the U.S. consumer. Personal debt going into this economic and financial crisis was something like 300 percent of GDP. Way, way overdone.

Consumers have looked at their own balance sheets, have been unable to borrow, and have been looking at the decline in their personal wealth — from the point of view of the prices of their houses and their financial assets — and have decided to save. And you’ve seen the savings rate tick up from virtually nothing to 5 or 6 percent of disposable income.

That’s a very important piece of good news for the long-run health of the U.S. economy, but in the short run, the more people save, the less they spend and the longer it’s going to take us to dig ourselves out of what is a very deep hole in terms of GDP.

I wonder about the effects of stimulus, and whether what we’re seeing right now is short-term or long-term. Clearly auto sales are up, but auto manufacturers are offering huge incentives and now the federal government has the clunker bill on the table, giving people $3,500 to $4,500 if they get rid of their old vehicles to buy new vehicles.

And of course, on the housing side, there’s the big gift from the federal government to get first-time buyers into the market to actually buy a home. So is some of this artificial?

Well, some of it is certainly the result of a variety of different aspects of the stimulus programs. Whether it was extended unemployment benefits, the checks that seniors got, the cash for clunkers, the new-time home buyers incentives — you know all of this has been part of the federal stimulus program.

Now the big issue is going to be: These have helped to increase confidence; they’ve put a little bit of money into people’s pockets; certainly house prices have come way down as a a result of the variety of factors in real-estate markets; mortgage rates bounce around, but they’ve been basically low, so housing has become affordable, particularly for people who still have jobs and so forth.

So the big issue is going to be — and this will probably lead to some slowness in the recovery as well — you know, when the first impact of the stimulus kind of fades away, will there be enough demand that’s growing in the economy to kind of slip in behind and give it a longer boost.

You know, there ’s a possibility — I don’t think it’s a strong possibility, but there’s a possibility — that you’ll run through this stimulus and the growth in the economy won’t be enough to fill in behind and we’ll have a bit of a double dip. So we’ve got to watch things carefully moving from the third quarter to the fourth quarter to the first quarter of 2010.

There’s also the issue of unemployment. Employment indicators are lagging. I mean, you need the economy to start showing positive growth — you need that so that you can start to not only employ the people who’ve been laid off, but also to employ new workers that are continually coming into the labor force.

So, it takes awhile for employment indicators to turn up after the overall economy has started to grow again. You’ve dug yourself and it takes awhile to come out of it, and employment is going to be one of the last things that starts to turn positive.

Increasing unemployment, which we’re going to see over the next six months or so, has its own downward effect on things. So there’s going to be a lot of jockeying back and forth, and you’re going to see data go back and forth over the next six months, but I think what we’re seeing now is definitely signs of bottoming out and we’re going to start to see what we need to see first, and that’s a little bit of positive momentum in the overall growth of the economy.