What will it take to get the economy moving again?
M&T Bank's chief economist, Gary Keith, thinks a big boost will come when consumers and businesses decide that it's safe to stop hunkering down and start taking some risks.
Keith thinks the U.S. economy and the Buffalo Niagara region, too, have put the worst of the recession behind them and are settling into a slow-growth mode that is likely to last through next year.
To Keith, that's a signal for businesses to stop being so defensive and start making some moves to take advantage of the opportunities that come with an economy that is slowly, but steadily, puttering along.
“We've been risk-averse. We've been hunkered down,” Keith said. “There has to be an element in the business community ... where some risk-taking comes back into the equation.”
It's not just businesses, though. The spending that consumers do accounts for almost 70 percent of the nation's economic activity, so how they're feeling plays a huge role in how the economy is doing. The recovery has been painfully slow because this recession hit consumers so hard, especially in markets where housing prices collapsed and left millions of homeowners saddled with homes that were worth less than their mortgages. It takes years for consumers whose personal finances have been wrecked to pick up the pieces.
But now, those consumers, who have curtailed their spending while they pay off the credit card debt that built up during the easy money years before the recession and are slowly recovering elsewhere from the housing market's collapse, also are feeling a bit better about their fortunes. While hiring is weak, the lucky consumers with jobs aren't quite as worried about losing them as they once were.
“Consumers are closer to being back in a position where they can make decisions about big-ticket purchases,” Keith said, noting that consumer confidence locally has rebounded to its pre-recession level.
But with the fiscal cliff looming at the end of this year as the Bush-era tax cuts expire and a wave of spending cuts are set to kick in, along with Europe's ongoing financial crisis, there's still plenty of uncertainty overhanging the economy. And uncertainty breeds caution, especially since the fragile economy could be pushed back into recession if the a deal to dodge the fiscal cliff isn't struck.
“Most of this will probably be kicked down the road,” Keith said. The politicians in Washington “will take the easy way out.”
Still, Keith sees reasons why some early risk-takers might pop their heads out of their bunkers to see if it's time to finally let their guard down.
Nationally, Keith sees a housing market that has been improving for seven straight months. Hiring remains sluggish, but Keith thinks unemployment is poised to decline ever so slowly. Consumer confidence, while still fragile, has strengthened to the point where more consumers are starting to think about making big ticket purchases that they had put off for so long.
“Confidence is the beginning of each purchase decision,” he said. “We've made progress, but it's sluggish.”
Locally, Keith thinks the Buffalo Niagara economy is doing OK, too. The region had a nice head start on the recovery because our relatively stable housing market never went bust. We don't have thousands upon thousands of consumers whose finances were wrecked because they bought homes at the peak of the boom.
“Because we didn't fall into such a deep hole, we're in a much better position,” Keith said. “We can run our lives and our businesses in a much more normal way than people in other parts of the country.”
And because we didn't fall as far, Keith said it's not surprising that our recovery hasn't been as robust as it has in those harder-hit areas. “Because we didn't fall as far, the bounce hasn't been as strong on the other side.”
While last week's job numbers show that the local labor market slowed to a crawl over the last three months, Keith is skeptical of their accuracy.
That's because one business services category, which accounts for about 5 percent of the region's labor market, is showing an inexplicable 19 percent decline this year — a swing of 6,500 jobs. Those numbers will be revised in March, using more extensive and updated data, and John Slenker, the state Labor Department's regional economist, thinks that decline will greatly reduced.
“When the revisions come out, I think we'll see a little stronger performance throughout the year,” Slenker said, probably with regional job growth between 0.5 percent and 1 percent, rather than the stagnancy that the preliminary numbers indicate.
Keith thinks the Buffalo Niagara economy grew by about 2 percent this year, and he expects the same next year. That's virtually in lockstep with what he sees the U.S. economy doing.
Considering that the Buffalo Niagara economy steadily lagged behind the nation for most of the past two decades, that's a good sign.
“Although it may not seem like it, relatively speaking, this is a fairly strong performance,” Keith said.
But it could be even better if the shackles of caution ever are loosened.
“If we start to play offense, we can begin to move forward faster,” he said.
“Let's take some risks,” he said. “Let's think about moving forward, rather than hunkering down.”