Another ‘recovery summer’
Ayear ago, Vice President Joseph R. Biden proclaimed the administration’s $830 billion stimulus spending spree would kick off “Recovery Summer.” It never came. For those hoping the dog days of 2011 might bring a change in the economic climate, the latest figures suggest this won’t be a summer of recovery, either.
Consumer spending increased an anemic 0.3 percent in May. When adjusted for inflation, this actually represents a 0.1 percent drop, meaning people were buying less for the first time since January 2010. This should come as little surprise considering after-tax, inflation-adjusted incomes are lower now than they were in January.
With less money in hand, people are paying more for consumption goods. The Personal Consumption Expenditures (PCE) Price Index was up 2.5 percent from a year ago, the biggest such jump since January 2010. The cost of volatile food and energy goods went up the most, but the core PCE index still grew by an unusually large amount — 1.2 percent — suggesting inflationary pressures are building in the economy. Much of the decline in real consumption spending can be linked to higher energy prices. When households are paying big money at the pump, less cash is available for other expenditures. That’s why real spending on durable goods such as automobiles and household appliances dropped 1.7 percent.
The household savings rate did go up a notch, to 5 percent. This is, in a way, good news because American consumers historically have saved too little. The current trend seems more to reflect an entirely warranted lack of confidence in the economy and in the future rather than a return of thriftiness.
Overall, the drop in real consumer spending is a particularly strong and worrisome indicator that the economy is in trouble. Consumer spending is more than two-thirds of aggregate demand in the economy. Whatever recovery is under way must slow down when consumers are on the sidelines. That can be seen in the latest gross-domestic-product growth rate of 1.9 percent. A similarly disappointing number is expected in the second quarter.
The growth rate needs to be 3 percent simply to absorb new workers from population growth. A minimum of 5 percent growth would be necessary to bring the unemployment rate down from its current high of 9.1 percent. That’s why the current 1.9 percent rate is so deeply disappointing. With high unemployment and mounting inflationary pressure, all the pieces seem to be in place for a period of stagflation.
President Obama has plenty of shortterm fixes, but it’s clear half measures aren’t going to cut it any more. There are only so many times the Strategic Petroleum Reserve can be tapped to manipulate the price of gasoline and briefly quell inflationary pressure. Short-term government spending does nothing to address the deeper malaise of high unemployment and low economic growth.
Short-term fixes leave untouched the real problems: the growing fiscal deficit, the high government debt level, the increasing burden of government regulation — all of which crowd out private investment and limit job creation in the private sector. There will be no recovery summer unless the president and Congress get serious about addressing policy problems with solutions that promote consumer confidence and get the government out of the way of American enterprise.