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.

Weekend Edition
September 21, 2018
Friday - Sunday
Alexandra Isfahani-Hammond
Hurricane Florence and 9.7 Million Pigs
Andrew Levine
Israel’s Anti-Semitism Smear Campaign
Paul Street
Laquan McDonald is Being Tried for His Own Racist Murder
Brad Evans
What Does It Mean to Celebrate International Peace Day?
Nick Pemberton
With or Without Kavanaugh, The United States Is Anti-Choice
Jim Kavanagh
“Taxpayer Money” Threatens Medicare-for-All (And Every Other Social Program)
Jonathan Cook
Palestine: The Testbed for Trump’s Plan to Tear up the Rules-Based International Order
Jeffrey St. Clair
Roaming Charges: the Chickenhawks Have Finally Come Back Home to Roost!
David Rosen
As the Capitalist World Turns: From Empire to Imperialism to Globalization?
Jonah Raskin
Green Capitalism Rears Its Head at Global Climate Action Summit
James Munson
On Climate, the Centrists are the Deplorables
Robert Hunziker
Is Paris 2015 Already Underwater?
Arshad Khan
Will Their Ever be Justice for Rohingya Muslims?
Jill Richardson
Why Women Don’t Report Sexual Assault
Dave Clennon
A Victory for Historical Accuracy and the Peace Movement: Not One Emmy for Ken Burns and “The Vietnam War”
W. T. Whitney
US Harasses Cuba Amid Mysterious Circumstances
Nathan Kalman-Lamb
Things That Make Sports Fans Uncomfortable
George Capaccio
Iran: “Snapping Back” Sanctions and the Threat of War
Kenneth Surin
Brexit is Coming, But Which Will It Be?
Louis Proyect
Moore’s “Fahrenheit 11/9”: Entertaining Film, Crappy Politics
Ramzy Baroud
Why Israel Demolishes: Khan Al-Ahmar as Representation of Greater Genocide
Ben Dangl
The Zapatistas’ Dignified Rage: Revolutionary Theories and Anticapitalist Dreams of Subcommandante Marcos
Ron Jacobs
Faith, Madness, or Death
Bill Glahn
Crime Comes Knocking
Terry Heaton
Pat Robertson’s Hurricane “Miracle”
Dave Lindorff
In Montgomery County PA, It’s Often a Jury of White People
Louis Yako
From Citizens to Customers: the Corporate Customer Service Culture in America 
William Boardman
The Shame of Dianne Feinstein, the Courage of Christine Blasey Ford 
Ernie Niemi
Logging and Climate Change: Oregon is Appalachia and Timber is Our Coal
Jessicah Pierre
Nike Says “Believe in Something,” But Can It Sacrifice Something, Too?
Paul Fitzgerald - Elizabeth Gould
Weaponized Dreams? The Curious Case of Robert Moss
Olivia Alperstein
An Environmental 9/11: the EPA’s Gutting of Methane Regulations
Ted Rall
Why Christine Ford vs. Brett Kavanaugh is a Train Wreck You Can’t Look Away From
Lauren Regan
The Day the Valves Turned: Defending the Pipeline Protesters
Ralph Nader
Questions, Questions Where are the Answers?
Binoy Kampmark
Deplatforming Germaine Greer
Raouf Halaby
It Should Not Be A He Said She Said Verdict
Robert Koehler
The Accusation That Wouldn’t Go Away
Jim Hightower
Amazon is Making Workers Tweet About How Great It is to Work There
Robby Sherwin
Rabbi, Rabbi, Where For Art Thou Rabbi?
Vern Loomis
Has Something Evil This Way Come?
Steve Baggarly
Disarm Trident Walk Ends in Georgia
Graham Peebles
Priorities of the Time: Peace
Michael Doliner
The Department of Demonization
David Yearsley
Bollocks to Brexit: the Plumber Sings
FacebookTwitterGoogle+RedditEmail