It’s still the Economy Stupid! (version 9.999999999)Posted: July 30, 2010 Filed under: Global Financial Crisis, U.S. Economy Comments Off on It’s still the Economy Stupid! (version 9.999999999)
Chatting up the ladies of The View is not going to get the majority of people’s minds off the worsening economy. The recovery is definitely slowing down and there are signs in the latest national product and income reports that are very disturbing to us necromancers of macroeconomics. The persistently high unemployment rate is taking its toll on consumer spending. Since that’s the main driver of the U.S. economy, things are not improving. It looks like on a sideways slide.
One of the things that I really noticed is what Keynes referred to as the paradox of thrift in action. The personal savings rate for the second quarter was reported as 6.2 percent of disposable income. This is significantly higher than the 4 percent that most of the forecasters had anticipated. Coupled with poor consumer sentiment, this is a bad sign.
Confidence among U.S. consumers fell in July to the lowest level since November, posing a threat to the biggest part of the economy.
The Thomson Reuters/University of Michigan final index of consumer sentiment declined to 67.8 this month from 76 in June. The preliminary measure was 66.5.
Employment growth has been slow to take hold and lower home prices are depressing wealth. The lack of confidence may further restrain consumer spending, which accounts for 70 percent of the economy, and limit the pace of growth.
“Consumers have a lot to be concerned about,” Eric Green, chief market economist at TD Securities Inc. in New York, said before the report. “Private job growth is showing signs of slowing, not accelerating,” he said, and stock prices have declined since peaking in April.
People are not feeling secure enough about their wealth (home values, stock portfolio values, etc.) and their jobs to spend money. Instead, they are either saving their money or paying down debt. Either behavior has a bad result for the economy because it doesn’t translate into immediate spending. Because banks are building liquidity and capital and boosting their incomes via fees and arbitrage of investments, they are not lending. This means consumer savings is not translating into business investment. Plus, what business in their right mind is going to expand their concerns when you don’t see customers coming through the doors?
In fact, one of the most interesting trends we’re seeing right now is that businesses are buying equipment and not hiring workers. What profits they do manage to make is going to upgrade existing capital.
The fact that businesses seem to be investing more in equipment than in hiring may be a reason why households have been reluctant, or perhaps unable, to pick up the pace of their spending.
“There are limits on the degree to which you can substitute capital for labor,” Mr. Ryding said. “But you can understand that businesses don’t have to pay health care on equipment and software, and these get better tax treatment than you get for hiring people. If you can get away with upgrading capital spending and deferring hiring for a while, that makes economic sense, especially in this uncertain policy environment.”
Even the Federal Reserve is worried about the current trends.
On Thursday, James Bullard, president of the Federal Reserve Bank of St. Louis, warned that the Fed’s policies were putting the economy at risk of becoming “enmeshed in a Japanese-style deflationary outcome within the next several years.”
The warning by Mr. Bullard, who is a voting member of the Fed committee that determines interest rates, came days after Ben S. Bernanke, the Fed chairman, said the central bank was prepared to do more to stimulate the economy if needed, though it had no immediate plans to do so. On Friday, the government will release its estimate of gross domestic product for the second quarter of this year.
At the Fed, Mr. Bullard had been associated with the camp that sees inflation, the central bank’s traditional enemy, as a greater threat than deflation brought on by anemic growth. Until now he had not been an advocate for large-scale asset purchases to reinvigorate the economy.
Meanwhile, Congress seems completely out to lunch when it comes to fiscal policy. There’s a concerted effort by the right wing of the Republican party and many DINOS to push a meme that it’s all the fault of selfish poor people. I was appalled to read this particular bit of that in WaPO (h/t to BB). The current line is to push people’s needs to actually cash in on the insurance programs they’ve paid for to help them through bad times (e.g. social security, medicare, unemployment insurance) as ‘entitlements’ or some kind of welfare. This branding of safety net insurance programs is horrifying. My father paid for his social security benefits for over 70 years since its inception. To suggest that he’s adopted a “me first” attitude because he’s cashing in on his benefits it’s beyond morally reprehensible. Indeed, Neel Kashkari –a former Bush Treasury appointee–suggest that we should sacrifice further for the good of U.S. corporations. It’s like the fact they’ve been underpaying us for our increased productivity for decades now wasn’t enough sacrifice.
Cutting entitlement spending requires us to think beyond what is in our own immediate self-interest. But it also runs against our sense of fairness: We have, after all, paid for entitlements for earlier generations. Is it now fair to cut my benefits? No, it isn’t. But if we don’t focus on our collective good, all of us will suffer.
When a Republican like Kashkari starts talking about the ‘collective good’ you best mind your wallets. He touts TARP bailouts while telling us we need to fork over our future social security benefits. (Notice he works for Pimco now, he undoubtedly wants to churn up some investment fees from privatized social security accounts and forced saving.)
If you dig deeper into the numbers, it appears that the only reason we’ve experienced lackluster growth has been due to programs like the home credits for first time buyers, cash for clunkers, and money to states that have been used to save state workers jobs. Basically, government programs have given a short, one time injection into various markets but it’s not stopping their trends. It’s only slowing the momentum.
I’ve mentioned that Louisiana is about ready to go off the ‘budget cliff’ in a year and that all state schools and health facilities face an across the board cut of around 24%. From what I can tell already, most of that will come by nearly halving the work force at nearly all state run institutions. No wonder Republicans want to cut ‘entitlements’. How can you shift so many folks on to unemployment rolls and still save the state budget? Louisiana isn’t even one of the worst states like California. (Although if Bobby Jindal continues to have his way, it will be.) If any thing, states like California should be asking the Federal government to stop subsidizing North Dakota and Nebraska and send them back their federal tax money. Without that money, states like Louisiana would’ve been in the dumps at least two years ago.
I’m not sure why the group that’s in Washington DC doesn’t seem to get the extent of the bad news when it comes to the economy. It’s either purposefully ostrich-like or purposefully callous. Maybe it’s because a lot of them have forgotten what it’s like to live through continually high unemployment and job insecurity. It’s possible that there’s just way too many lawyers there and none of them have actually had experience with running a business or working like a serf for an unappreciative corporation.
Whatever it is, they need to get over themselves really quickly. If these patterns continue, it’s going to be a long slow decade and I for one, will not look kindly on any one that asks me to sacrifice for the good of corporate profits. This is especially when that sacrifice comes to giving back benefits that I’ve paid for since I was 15 years old and got my first job with a paycheck.