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Why the U.S. economy could still use some stimulus

The economy is just about there, and an added boost could finish the job

After October’s great jobs report, it’s all but accepted that the Federal Reserve will finally begin to raise interest rates next month.

But don’t forget: Just a few days ago, even very smart people who get to vote on such things were still harping on data showing that manufacturing is flirting with a renewed recession even in the U.S., and that trade partners from China to Canada are trying to shake off slow growth and market stress (China) or even a new downturn (Canada).

So what to do?

The answer comes, from of all places, Congress, which finally abandoned the sequestration provisions of the 2011 Budget Control Act and set the stage for a $50 billion boost to federal spending this year. That’s enough to increase the size of the economy by 0.3% next year, Goldman Sachs estimates. But the thing Congress must do now is target how the money is spent to bolster manufacturing and the few other lagging sectors of the economy.

That way, when rates begin to rise, we can tell ourselves that it’s time — which we’ll know because we’ll finally be doing everything we can to make this expansion work for all Americans.

It really doesn’t take much, at this point, to declare the economy working for nearly everybody. Longtime laggard industries like construction are getting into the swing — the Labor Department had said construction hiring was soft until October, but ADP’s rival surveys have shown it above 15,000 new jobs every month this year. Service hiring, from health care to even banking, is solid.

And Friday’s report shows a 2.5% year-over-year gain in wages, which comes well after data from the Census Bureau and other agencies had showed wage growth accelerating. This combination of hiring that suggests broad-based growth, coupled with wage hikes in the middle, is what I meant when I suggested benchmarks for the first rate hike — most of which have now been met, and faster than I expected.

But what it does take is some work on manufacturing and other sectors well-suited to being helped by fiscal policy — the exact course of action that both Janet Yellen and her predecessor as Federal Reserve chair, Ben Bernanke, have spent years pleading for.

The work can begin with a highway bill approved by the House last week. It’s now set to be reconciled with a version the Senate has already passed. The existing bills pretty much continue funding at current levels, and passing them would only prevent the imposition of more austerity, said Jared Bernstein, former economics adviser to Vice President Joe Biden and now senior fellow at the Center for Budget and Policy Priorities. But put some of that $50 billion, which has not yet been allocated to specific programs, into the highway bill and it can support new purchases of steel, asphalt and the rest of what goes into highways and bridges, Moody’s Analytics budget guru Dan White said.

“My impression is that there are a lot of shovel-ready projects in the pipeline, in no small part because the highway funding has been so uncertain,” said Bernstein, who was around for the last time the Feds set out to find such projects in a hurry. “If we could steer some of the new budget resources to infrastructure projects that won’t get funded by the highway bill, that would support the momentum we saw in the jobs report.”

The budget boost can also put a little light under manufacturing by allowing for a relaxation in defense cuts that had been especially sharp. Reportedly, about a quarter of the defense cuts since 2011 have come in procurement, even as the Pentagon protected high-profile weapons programs like the F-35 fighter, which has an outsized impact on Dallas/Fort Worth and is (by political design) set up to spread work to hundreds of congressional districts.

Right after the highway bill, which is supposed to pass by Nov. 20, Congress should get busy identifying ways to apply the extra budget flexibility to balance military readiness and lending a hand to manufacturers great and small who work for the Pentagon.

Better minds than mine can take it from there. There are lots of ways to help, and the path from 5% unemployment to real, shared prosperity is so simple even a congressman can do it.

Tim Mullaney writes about economics for MarketWatch.

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