It seems that the people who could not see an $8 trillion housing bubble are now optimistic about the economy's prospects. That's what the Washington Post tells us. The article points to strong bank profits, respectable March retail sales, and a modest rise in exports. While it is possible to say that all the numbers could have been worse, these data do not provide much grounds for optimism. In the case of bank profits, much of the profit was driven by a surge in mortgage refinancing which produces large fees for banks. This surge will continue for the near term, but before long most of the people who are able to refinance their mortgages will have done so. Banks have also opted not to declare large write-downs of bad loans in the current quarter. They have apparently decided, possibly for political reasons, to defer write-downs of bad debts for future quarters. It is important to put reports on chain store retail sales in some context. First, the same store sales are higher relative to overall chain sales because the chains have opened fewer new stores over the last year and in some cases actually have fewer stores in March of 2009 than in March of 2008. More importantly, there will be some upward bias in the chain store sales overall since there are fewer alternatives stores in 2009 than in March 2008. Many stores that might have provided competition for the chains in March of 2008 no longer exist in March of 2009. Therefore, we should expect to see an increase in chain store sales even if there had been no change whatsoever in overall retail sales. The article also cites Richard W. Fisher, the president of the Dallas Fed, as saying that the unemployment could cross 10 percent by the end of the year. It is encouraging that even a Fed bank president might now recognize this fact, but Post readers should know that it is a virtual certainty that unemployment will cross 10 percent by the end of the year. The arithmetic is fairly simple. The economy shed 680,000 jobs per month over the last three months. Weekly unemployment insurance filings have been as high over the last month as at any point in the prior three months, which means that the April data will almost certainly show a similar rate of job loss. This will push the April unemployment rate up by 0.4-0.6 percent to between 8.9 to 9.1 percent. If job loss just stopped for the next eight months, the unemployment rate would rise by approximately 0.5 percentage points by December. There is no one who thinks that the economy will suddenly stop losing jobs after April, nor that it will start creating jobs before the end of 2009. This means that it is a virtual certainty that the unemployment will cross 10 percent by the end of the year.
--Dean Baker