Summertime and the livin’ is… queasy?


Your daddy’s rich / And your mamma’s good lookin’
So hush little baby / Don’t you cry
Summertime, from Porgy & Bess by George Gershwin

As the school year winds down, summer officially starts. You wouldn’t know it in the upper Midwest, where a cold rain has drizzled down nearly every day for the last month. Though a lot of crops didn’t make it into the field on time, it’s really summer. The thermometer might not say it, but the economic reports do.

Every year at this time there is a small recession, a general slowdown. It’s why so many financial advisers avoid stocks this time of the year. But wasn’t this year supposed to be different? It was. But it isn’t. And that has everyone scrambling to explain why things are looking a little bit blue.

They shouldn’t. This is normal – or normal amplified a bit by general uneasiness for the long haul.

We’ll start with the expectations game, which defines a lot of reporting in both politics and economics. Everyone knows that the summer slows down some, but in good times it’s hardly noticed. Since 2010 the decline has been enough to make everyone nervous that the “recovery” is stalling. The ADP jobs report came in at a meager 135k jobs created in May, far below the 175k we saw earlier in the year. Stocks tumbled on the news. But this is about the same as the 133k created in May of 2012.

That hasn’t stopped those who are supposed to explain things from trying to come up with a reason. The sequestration has been blamed often, but the Federal Reserve’s “Beige Book” narrative of the economic situation hardly mentions the decline in government expenditures so far this year. Nothing seems to stand out as far out of the ordinary.

That’s not to say that the sequestration cuts get a complete pass. A separate study by the San Francisco Federal Reserve suggests that up to 1% will be shaved off of GDP growth by the deep reduction in the federal deficit, from 10% of GDP to around 4%. But the effects of this will come in gradually over the next three years. The Federal Reserve has warned that this austerity is going to come at a price:

Federal fiscal policy has been a modest headwind to economic growth so far during the recovery. This is typical for recovery periods and in line with the historical relationship between the business cycle and fiscal policy. However, CBO projections and our estimate based on the countercyclical history of fiscal policy suggest that federal budget trends will weigh on growth much more severely over the next three years. The federal deficit is projected to decline faster than normal over the next three years, largely because tax revenue is projected to rise faster than usual. Given reasonable assumptions regarding the economic multiplier on government spending and taxes, the rapid decline in the federal deficit implies a drag on real GDP growth about 1 percentage point per year larger than the normal drag from fiscal policy during recoveries.

Those are the expectations that are set up for the economy this year. Even though there is no sign that this has happened yet the sequestration cuts are being written into the narrative of a weaker “recovery” period as things slow down into June.

That hasn’t been realized yet, and it’s only sinking in slowly. The real story? It’s merely summertime and the livin’ is easy. We’ve seen this every year since this stage of the depression came, and we’ll continue to see it. The longer haul is going to be a problem, however, unless we can craft a budget that supports genuine growth and doesn’t worry about austerity. Given how our trading partners are responding so far, we have plenty of wiggle room.

It’s best to relax and take the season off, eh? I hear the catfish are jumpin’ …