High gas, food costs grind back growth

The Washington Times Weekly - - National - BY PA­TRICE HILL

Growth slowed sharply to a 1.8 per­cent pace in the win­ter quar­ter from 3.1 per­cent at the end of last year as bud­get cuts at all lev­els of gov­ern­ment and a surge in oil prices weighed on the econ­omy, the Com­merce Depart­ment re­ported April 28.

The jump in oil prices to more than $100 a bar­rel, and soar­ing prices for corn, wheat and other com­modi­ties, caused a near dou­bling of the in­fla­tion rate to 3.8 per­cent from 2.1 per­cent in the fourth quar­ter of 2010. That meant that con­sumers had less spend­ing power, caus­ing their con­tri­bu­tion to eco­nomic growth to de­cline to 2.7 per­cent from 4 per­cent.

“Sharply higher gaso­line and food prices are tak­ing a toll on growth,” said Sam Bullard, a se­nior econ­o­mist at Wells Fargo Se­cu­ri­ties. He said that caused con­sumers to backpedal af­ter they fu­eled ro­bust spend­ing growth at the end of last year.

“Re­tail gaso­line prices have risen roughly 85 cents since the start of the year, while food prices were up an an­nu­al­ized 7.5 per­cent” dur­ing the quar­ter, he said. Still, “con­sumer spend­ing held up rea­son­ably well de­spite those chal­lenges.”

While con­sumers and busi­nesses got zapped by higher in- fla­tion, gov­ern­ments faced with un­sup­port­able debts at ev­ery level slashed spend­ing.

The col­lec­tive drop of 5.2 per­cent in gov­ern­ment spend­ing was the largest since 1983, pro­vok­ing a lively po­lit­i­cal de­bate about the role gov­ern­ment spend­ing plays in the econ­omy.

Repub­li­cans such as Rep. Tom Price of Ge­or­gia, the House Repub­li­can Pol­icy Com­mit­tee chair­man, con­tin­ued to call for more spend­ing cuts, in­sist­ing that they will help the econ­omy by spurring faster growth in the pri­vate sec­tor. But Democrats and lib­eral groups said the re­port shows that cut­ting spend­ing too fast will throt­tle the eco­nomic re­cov­ery.

Fed­eral Re­serve Chair­man Ben S. Bernanke tends to view gov­ern­ment spend­ing as a stim­u­lus for the econ­omy, but he and other econ­o­mists also warn about the dan­ger of too much spend­ing and debt.

Chris­tian Proano, as­sis­tant pro­fes­sor of eco­nom­ics at the Schwartz Eco­nomic Pol­icy Cen­ter, said “it is un­de­ni­able” that gov­ern­ments need to pare down sov­er­eign debts, which col­lec­tively to­tal nearly 95 per­cent of eco­nomic out­put — a level deemed dan­ger­ous in eco­nomic cir­cles.

“How­ever, an overly hasty re­ver­sal of the U.S. fis­cal stance based pri­mar­ily on gov­ern­ment spend­ing cuts could be coun­ter­pro­duc­tive given the frag­ile sit­u­a­tion of the U.S. econ­omy,” he said.

The re­port clearly showed that gov­ern­ments at all lev­els are in­creas­ingly con­strained by mount­ing debt. The pub­lic sec­tor over­all emerged force­fully dur­ing the first quar­ter as a dead weight on growth af­ter help­ing to sup­port the econ­omy dur­ing most of the Great Re­ces­sion and early re­cov­ery pe­riod.

The fed­eral gov­ern­ment axed de­fense spend­ing by 11.7 per­cent — nearly six times the de­crease seen at the end of 2010. State and lo­cal spend­ing fell by 3.3 per­cent af­ter drop­ping 2.6 per­cent in the fourth quar­ter.

Wells Fargo’s Mr. Bullard said the drag from gov­ern­ment bud­get cuts was sig­nif­i­cant and should con­tinue for some time “as of­fi­cials are forced to con­tinue to make dif­fi­cult de­ci­sions in terms of spend­ing cuts and tax in­creases to bring deficits un­der con­trol.”

States and lo­cal gov­ern­ments have been in a re­trench­ment mode for more than a year. But while the drop in fed­eral de­fense spend­ing was eye-pop­ping, an­a­lysts say over­all that the fed­eral gov­ern­ment is not acting to re­duce growth be­cause gen­er­ous tax cuts en­acted in De­cem­ber are off­set­ting re­cent spend­ing cuts.

“Over­all fed­eral fis­cal pol­icy is roughly neu­tral for growth, with the pay­roll tax cut and ex­tended un­em­ploy­ment in­surance ben­e­fits off­set­ting the drag from the wind­ing down of stim­u­lus spend­ing,” said Au­gus­tine Faucher, an econ­o­mist at Moody’s An­a­lyt­ics.

Mr. Bernanke also said at an April 27 news con­fer­ence that he is not wor­ried that fed­eral spend­ing cuts are en­dan­ger­ing growth, al­though he has openly fret­ted from time to time that state and lo­cal bud­get cuts will hurt the econ­omy.

Mr. Bernanke em­pha­sized that the huge fed­eral debt, at $14 tril­lion and grow­ing rapidly, is a far big­ger threat to the econ­omy in the long run, and it is im­por­tant for Congress and the White House to reach a deal to curb the growth in fed­eral spend­ing, he said.

Econ­o­mists were not overly con­cerned about a jump in state un­em­ploy­ment claims to 429,000 two weeks ago, not­ing that the job trends have been im­prov­ing over­all with the un­em­ploy­ment rate down to 8.8 per­cent from dou­ble-digit lev­els dur­ing the re­ces­sion.

Mr. Bernanke stressed that the eco­nomic slow­down early this year was in­flu­enced by tran­si­tory fac­tors, in­clud­ing harsh weather that held back con­struc­tion, as well as the surge in oil prices.

But he con­ceded that the leap in reg­u­lar gaso­line prices to more than $3.80 a gal­lon, with prices ex­ceed­ing $4 for var­i­ous blends across the coun­try, has been a hard­ship for con­sumers and is se­ri­ously im­pair­ing their spend­ing power. He said he ex­pects in­fla­tion to sub­side to about 2 per­cent in the months ahead.

While Mr. Bernanke sought to put a good face on the shift­ing econ­omy, Bernard Bau­mohl, an econ­o­mist at the Eco­nomic Out­look Group, said the first quar­ter de­vel­op­ments were dif­fi­cult for the cen­tral bank.

“There is no greater curse on Fed pol­i­cy­mak­ers than the com­bi­na­tion of a slow­ing econ­omy and ac­cel­er­at­ing in­fla­tion, es­pe­cially when both are largely the re­sult of events tak­ing place out­side the U.S.,” he said.

“In this in­stance, it is ro­bust de­mand for food and fuel com­ing from fast-grow­ing emerg­ing coun­tries and the geopo­lit­i­cal tur­moil that has spread across the oil-rich re­gions of North Africa and the Mid­dle East. And nei­ther of these for­eign dy­nam­ics show signs of de-es­ca­lat­ing.”

Mr. Bernanke said there is noth­ing the Fed can do to curb the rise in oil prices caused by the Mid­dle East tur­moil, other than throw the econ­omy back into a re­ces­sion by rais­ing in­ter­est rates.

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