NEWS AND PHOTOS

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Monthly Economic Review - September 2010.
By Joel L. Naroff, TD Bank Chief Economist

With the economy sputtering, households spending cautiously and businesses uneasy about hiring, it is with great anticipation we enter the election campaign season. Unfortunately, the need to simplify the discussion usually leads to incredible and often outrageous campaign economic claims. So, as a public service, here are my views of some of the claims being made.

Claim #1: Spending lots of money on infrastructure will get the economy surging: While most economists agree the best thing government can spend money on is infrastructure, it takes too much time to design and build the desperately needed roads, bridges, transit lines, schools and water projects to help in the near future. Better infrastructure improves growth potential over time, but provides limited immediate oomph.

Claim #2: If you just cut taxes the economy will soar and the deficit will disappear: Alas, the economic literature is clear that cutting taxes increases the deficit, especially in the near term. In addition, which taxes are cut matters greatly. The tax breaks go to all who qualify, not just those incented to invest or spend more. Thus, it is critical to reduce only those taxes that dramatically and quickly change business and household spending decisions. Only then will significant additional economic activity occur. If little added activity is created, businesses and households still receive the tax breaks, but they get it for doing what they would have done anyway. Tax revenues would decline, the deficit would widen but growth would not increase greatly.

Claim #3: Economic activity will surge if you reduce the deficit by cutting spending: Reducing government spending does not increase growth in the short term. Very simply, a dollar not spent, no matter who doesn’t spend it, is a dollar not spent. It is what economists call a contractionary fiscal policy: It contracts the economy. Over time a credible deficit reduction package will create more confidence in the dollar and keep interest rates lower than they would be without one, increasing long term growth. But it will not accelerate growth right now.

Claim #4: The financial sector bailout was a waste of money and we would have been better off without it: Few economists believe that allowing the financial system to crash and burn would have been the right course of action. We can debate the way it was done and the bad decisions and wasted money that were part of the program, but the result was a financial system that is now at least stable. The alternative would have been even more bankruptcies and an even tighter credit environment.

Claim #5: The stimulus was a great success: It did begin the process of recovery as neither businesses nor households were going to spend during the first half of 2009. But a lot was wasted and programs like cash for clunkers and first-time home-buyers credits affected the timing of demand. How much additional spending was created will be debated for years but I think it is fair to say it didn’t do as much as hoped for nor as little as some argue.

In this the year of the voter’s discontent, it is indeed the economy that matters. But that doesn’t mean all or even any of the political claims make economic sense. As I like to say, “If you get your economics from a politician, you get the economy you deserve”.

Joel L. Naroff, Ph.D, is Chief Economist for TD Bank, America’s Most Convenient Bank®. Following TD Bank Financial Group’s acquisition of Commerce Bancorp Inc. on March 31, 2008, TD Banknorth and Commerce Bank merged on May 31, 2008, to become TD Bank, America’s Most Convenient Bank. Today, TD Banknorth and TD Bank form one of the 20 largest commercial banking organizations in the United States with more than $114 billion in assets, and provide customers with a full range of financial products and services at nearly 1,100 convenient locations from Maine to Florida. TD Bank is headquartered in Cherry Hill, NJ and Portland, ME. TD Banknorth and TD Bank are trade names of TD Bank, N.A. For more information visit www.TDBanknorth.com and www.TDBank.com.

TD Bank, America’s Most Convenient Bank, is a wholly-owned subsidiary of TD Bank Financial Group, one of the strongest banks in the world. Among the top 40 banks in the world, TD Bank Financial Group is one of only seven to be rated “Aaa” by Moody’s.

Monthly Economic Review - April 2010.
By Joel L. Naroff, TD Bank Chief Economist

Jobs. That is all everyone seems to have been talking about. The complaints were many and loud and centered around all that money the government was spending but so little new positions which were being created. Thankfully, that is all beginning to change. But while consumers may be spending and businesses are starting to hire, there is the possibility that the strong growth we are now seeing is more a matter of making up for past decisions than looking forward and seeing a robust economy.

The economy boomed at the end of last year, or at least it seemed to. A 5.6% growth rate is nothing to sneeze at. But most of the growth came from companies finding that it was hard to run business when you have nothing on the shelves. The move back toward somewhat normal levels of stocks was a key factor at the end of last year.

Now, it appears that firms have decided to add workers. There were 162,000 new positions in March with the bulk coming from businesses. The gains were across most industries except the weakest, real estate and finance. Even construction was up. In addition, the decennial Census is under way, requiring the federal government to temporarily add lots of helpers. Remember, those workers will be cut loose once the counting is done.

While there may be some additional Census hiring, the real issue is the ability of the private sector to keep adding to payrolls. Here, we should consider the likely pattern of inventory building. Once firms get to levels of goods in the warehouses that are acceptable, they will likely simply maintain those supplies. Therefore, the boost to growth will slow dramatically. A similar pattern could easily occur with hiring. Once firms fill in the empty slots that they really should have filled already, but were afraid to, the rate of job growth could slow.

Essentially, the first phase of the recovery, which I call the “return to sanity” portion, is ending. Instead of the panic cutbacks we saw last spring, we are now experiencing some new spending, investing, restocking warehouses and hiring.

Since we have gone from closing warehouses and slicing workers to adding workers and putting goods on shelves, the growth looks incredibly strong. But that could be another head fake. Instead, we may be entering the next stage of the recovery, what I call the “what do we do next?” phase. Here, businesses and households have met most of the needs they put off but are not necessarily going to keep up that extra spending. We could see that happening by the summer.

My concerns about growth are not limited to the completion of the backfilling of inventories and workers. The economy is still fighting some significant headwinds. The financial sector is still recovering and credit will become more available but not all at once. Without reasonably easy credit, there’s only so fast the economy can grow. Continuing high unemployment rates this year could limit the rise in consumer confidence. Slowly growing wages and modestly rising incomes also point to more moderate consumer spending.

The recovery is on course even if we get hit some bumps in the road. That’s because after the “what do we do next?” stage, we get to the “let’s get on with our lives/business” phase. That is when we return to normal growth and it is coming.