FacebookTwitterGoogle+RedditEmail

The Lingering Economic Malaise

Today, the Commerce Department reported in June personal income increased $6.8 billion or 0.1 percent, and disposable personal income decreased $210.3 billion or 1.8 percent, because the stimulus rebate checks inflated May income figures. Personal consumption expenditures increased $76.5 billion or 0.6 percent but adjusted for inflation, consumer spending was down 0.2 percent.

Consumer spending contributed importantly to the 1.9 percent increase in second quarter GDP; however, this was largely from a boost in May consumer spending spurred by the $168 billion stimulus package checks. Not all this money was spent in May; much was saved and available for spending in June, but consumers slowed down.

Rising unemployment, falling home prices, tougher credit card terms, and high gas prices have consumers hunkering down. Particularly weak has been consumer spending on durable goods, reflecting growing pessimism about the outlook for the economy.

Without an additional government policy jolt, the economy is headed for a very slow second half of 2008. Either the third or fourth quarters should register negative GDP growth.

The economic malaise is significantly caused by the failure of the Wall Street banks to straighten out their business and mortgage lending operations. They can’t adequately access the fixed income market to raise money to finance loan to businesses and home buyers—in the wake of the subprime scandals, insurance companies, pension funds and other fixed income investors don’t trust the banks and won’t buy their loan-backed bonds. The Federal Reserve and Treasury have shored up the banks with emergency lending but done little to address these systemic problems.

Now, widespread credit shortages and huge payments abroad for high priced oil and consumer goods from China are driving down demand for U.S. made goods and services, and destroying jobs. With Federal Reserve, Treasury and the Congress taking little action to address these problems, the economic mess should continue into 2009

The news on inflation is unsettling but should improve.

The price index for personal consumption expenditures, including food and energy, was up 0.8 percent in June and was up 4.1 percent from June 2007. However, this has been largely caused by higher oil and food prices, and the news on oil prices should get better.

The Federal Reserve closely watches the price index for personal consumption expenditures, less food and energy. This core price index was up 0.3 percent in June, after rising 0.1 and 0.2 percent in April and May. In June, the index was up 2.3 percent from June 2007.

As important to the Federal Reserve, the market-based core inflation index, which excludes food, energy and imputed prices like rent on owner occupied homes, was up 0.3 percent in June, after rising 0.2 and 0.1 percent in April and May. That index has increased 2.0 percent since September 2007.

In the second half of 2008, global oil and other commodity price inflation should moderate, and as the effects of slowing demand grip the economy, the feedback effects of higher energy and commodity prices into U.S. core inflation should ease.

In July, gasoline prices were up only 0.2 percent in July and have been falling in recent weeks. Overall, headline inflation should moderate soon.

The Federal Reserve, by constraining U.S. economic activity, can do little to lower global oil and other commodity prices sooner than market forces require. Despite the ruminations of inflation hawks on the Open Market Committee, the federal funds rate is likely to remain unchanged beyond the November election and into 2009.

The Federal Reserve Open Market Committee meets Tuesday but hardly anyone expects an interest rate hike. Most attention will be focused on the Committee’s statement about the risks of inflation and slowing growth. Look for noise about inflation, to placate the hawks, but nothing in this portends action.

As the economy slows down during the second half and job losses mount, the Fed will have few options but to admit the economy suffers from severe structural problems beyond the reach of interest rate policy, or look completely out of touch. The failure of the large money center banks to adequately participate in business and mortgage lending, their inability to securitize loans thanks to flawed and suspicious management practices, and the taxes on growth from large trade deficits on oil and with China will drag on the economy like leg irons on a capsized sailor.

PETER MORICI is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.

 

 

 

 

More articles by:

PETER MORICI is a professor at the Smith School of Business, University of Maryland School, and the former Chief Economist at the U.S. International Trade Commission.

July 19, 2018
Rajai R. Masri
The West’s Potential Symbiotic Contributions to Freeing a Closed Muslim Mind
Jennifer Matsui
The Blue Pill Presidency
Ryan LaMothe
The Moral and Spiritual Bankruptcy of White Evangelicals
Paul Tritschler
Negative Capability: a Force for Change?
Patrick Bond
State of the BRICS Class Struggle: ‘Social Dialogue’ Reform Frustrations
Rev. William Alberts
A Well-Kept United Methodist Church Secret
Raouf Halaby
Joseph Harsch, Robert Fisk, Franklin Lamb: Three of the Very Best
George Ochenski
He Speaks From Experience: Max Baucus on “Squandered Leadership”
Ted Rall
Right Now, It Looks Like Trump Will Win in 2020
David Swanson
The Intelligence Community Is Neither
Andrew Moss
Chaos or Community in Immigration Policy
Kim Scipes
Where Do We Go From Here? How Do We Get There?
July 18, 2018
Bruce E. Levine
Politics and Psychiatry: the Cost of the Trauma Cover-Up
Frank Stricker
The Crummy Good Economy and the New Serfdom
Linda Ford
Red Fawn Fallis and the Felony of Being Attacked by Cops
David Mattson
Entrusting Grizzlies to a Basket of Deplorables?
Stephen F. Eisenman
Want Gun Control? Arm the Left (It Worked Before)
CJ Hopkins
Trump’s Treasonous Traitor Summit or: How Liberals Learned to Stop Worrying and Love the New McCarthyism
Patrick Bond
State of the BRICS Class Struggle: Repression, Austerity and Worker Militancy
Dan Corjescu
The USA and Russia: Two Sides of the Same Criminal Corporate Coin
The Hudson Report
How Argentina Got the Biggest Loan in the History of the IMF
Kenn Orphan
You Call This Treason?
Max Parry
Ukraine’s Anti-Roma Pogroms Ignored as Russia is Blamed for Global Far Right Resurgence
Ed Meek
Acts of Resistance
July 17, 2018
Conn Hallinan
Trump & The Big Bad Bugs
Robert Hunziker
Trump Kills Science, Nature Strikes Back
John Grant
The Politics of Cruelty
Kenneth Surin
Calculated Buffoonery: Trump in the UK
Binoy Kampmark
Helsinki Theatrics: Trump Meets Putin
Patrick Bond
BRICS From Above, Seen Critically From Below
Jim Kavanagh
Fighting Fake Stories: The New Yorker, Israel and Obama
Daniel Falcone
Chomsky on the Trump NATO Ruse
W. T. Whitney
Oil Underground in Neuquén, Argentina – and a New US Military Base There
Doug Rawlings
Ken Burns’ “The Vietnam War” was Nominated for an Emmy, Does It Deserve It?
Rajan Menon
The United States of Inequality
Thomas Knapp
Have Mueller and Rosenstein Finally Gone Too Far?
Cesar Chelala
An Insatiable Salesman
Dean Baker
Truth, Trump and the Washington Post
Mel Gurtov
Human Rights Trumped
Binoy Kampmark
Putin’s Football Gambit: How the World Cup Paid Off
July 16, 2018
Sheldon Richman
Trump Turns to Gaza as Middle East Deal of the Century Collapses
Charles Pierson
Kirstjen Nielsen Just Wants to Protect You
Brett Wilkins
The Lydda Death March and the Israeli State of Denial
Patrick Cockburn
Trump Knows That the US Can Exercise More Power in a UK Weakened by Brexit
Robert Fisk
The Fisherman of Sarajevo Told Tales Past Wars and Wars to Come
FacebookTwitterGoogle+RedditEmail