An­other ‘re­cov­ery sum­mer’

The Washington Times Weekly - - Editorials -

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.

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