NEW YORK – Inventory correction has been completed and manufacturing, housing and consumer spending all trend weaker in the near future, leading Federal Reserve Bank of Dallas President Richard W. Fisher to expect gross domestic product growth under 3% for a “prolonged period.”
“Economic growth is no longer being aided by the inventory correction that propelled the economy in the fourth quarter of last year and the first quarter of this year. And software and equipment purchases are closer to catching up with demand. Against this background, recent relatively weak data indicating slower manufacturing growth, a dyspeptic housing sector and continuing consumer anxiety point to a slightly weaker national outlook, with growth from the first quarter onward likely to fall below 3 percent for a prolonged period,” Fisher told the Greater San Antonio Chamber of Commerce according to prepared text of his remarks, which were released by the Fed.
A slow, bumpy recovery in the labor market, with better and household spending, will be limited to “entrepreneurial hot spots like Texas,” he said, “But, on net, I fear the nation’s economy will be sailing forward at suboptimal speed, despite the fact that the cost of borrowing is low, equity markets have shown resilience and liquidity is plentiful on corporate balance sheets and in the form of excess reserves in the banking system.”
Fisher blamed “random refereeing” for the slow growth. He said when government rewrites the rules during recovery, businesses and consumers can’t process the many potential changes in the taxes and regulations and therefore don’t know how to proceed. “Awaiting clearer signals from the referees that are the nation’s fiscal authorities and regulators, they have gone into a defensive crouch.”
He added, “Capitalism works best when people take sensible, calculated risks in innovating and conducting normal economic activity. Uncertainty and risk are natural parts of business—capitalists handicap and deal with them every day. However, excessive uncertainty hinders one’s ability to even calculate the odds of potential outcomes—especially when that uncertainty involves irreversible decisions with long-term implications.”
Citing his discussions with business leaders, Fisher said, they bemoan “the lack of consistent direction coming from Washington. They are confused and dispirited by random refereeing. So they are calling time-outs and heading to the sidelines while they wait for the referees to settle on the rules of the game.”
Under those circumstances, he added, “no amount of further monetary policy accommodation can offset the retarding effect of heightened uncertainty over the fiscal and regulatory direction of the country. As long as our economic players—businesses and consumers—are beset by unmanageable uncertainty, they will refrain from making decisions that provide the stuff of economic growth. Indeed, one could posit that further monetary accommodation might make the situation worse if private sector operators were to conclude that the Federal Reserve has become politically pliable and is prone to substituting such accommodation for fiscal discipline.”
Three ways large fiscal imbalances adversely affect economic performance are: “They crowd out private-sector economic activity; they hinder policymakers’ ability to run a loose fiscal ship during recessions to allow individuals to smooth their consumption over the business cycle; and, finally, they raise the probability of a debt crisis.”
While deficit spending is often used to stimulate economic recovery, and “unique advantages” insulate the United States “to some degree from the deleterious effect of deficits,” Fisher said, if fiscal imbalances swell to the extent currently predicted, there will be no insulation. Policymakers must at least state how much emphasis they will place on debt reduction over the next few years. He added, the “Fed cannot and will not monetize the debt. We know what happens when central banks give in to those requests—it leads us down the slippery slope of debasing our currency and puts us on the path of hyperinflation and economic destruction. Neither I nor my colleagues are willing to risk that legacy.”
Regulatory reform, he said, has added uncertainty by ambiguous passages in the bill.
Fisher said the way to proceed is the “Fed must continue to comport ourselves in a manner that exorcises any lingering worries about our willingness to brook any political interference with our commitment to fostering price stability and maximum sustainable employment. We delivered on our duty to restore liquidity to the commercial paper, asset-backed securities, interbank lending and other markets. We then closed out all of our extraordinary liquidity facilities, doing so without costing the taxpayer a dime (imagine that: a government agency that closes programs after they have outlived their usefulness!). We have worked hard to earn the respect of the marketplace and of the nation, and we dare not risk it at a time when there is so much uncertainty elsewhere.
“Second, our political leaders should muster the courage to pull up their socks and strike a better balance between the long-term need to keep government debt low and the short- to medium-term need for an appropriate level of fiscal stimulus.
“Finally, it is important that we obtain clear and forthright government policies. Businesses can pursue their economic interests only if government honors its commitments and ensures a fair and equitable playing field. Unclear policies and undefined regulations create uncertainty and instability that bollix long-term planning. Those responsible for enforcement of recently passed reforms need to focus with laser-like intensity on addressing the regulatory indigestion that has engulfed our economy.”
Until business operators have clarity, “they will continue to hoard their cash, limit their payrolls and constrain investment in new plant and equipment—none of which provides hope for the unemployed or will put us on a more forceful path to recovery,” Fisher said.
