I know we’ve seen some upward bumps in the stock market in recent days, but the reality is they are anomalies and do not really give an accurate picture of the economy. News like this, however, does:
a government report released Thursday showed that the economy contracted in the third quarter as consumer spending dipped for the first time in 17 years.
Economists said the drop in economic activity — with the gross domestic product shrinking at a 0.3 percent annual rate — presages more bad news in the months ahead. The impacts of a now-global financial crisis are continuing to squeeze companies and impede investment, prompting more layoffs and another wave of austerity.
“The economy has taken a turn for the worse, big time,” said Allen Sinai, chief global economist for Decision Economics, a consulting and forecasting group. “Consumption literally caved in. It is a prelude to much worse news on the economy over the next couple of quarters. The fundamentals around the consumer are all negative, and there are no signs of any help anytime soon, from anywhere.”
The story continues:
Thursday’s government report showed that consumer spending — which makes up more than 70 percent of American economy activity — dipped at 3.1 percent annual rate between July and September, after growing at a 1.2 percent annual rate in the previous three months.
That was the largest three-month drop since the second quarter of 1980, a contraction that was in some sense artificial: the Carter administration, seeking to suffocate inflation, imposed limits on bank borrowing. Putting that episode aside, this year’s drop represents the sharpest decline in consumer spending since the end of 1974.
Floyd Norris, chief financial correspondent of The New York Times and The International Herald Tribune, wrote on his blog earlier today that “Consumers are clearly in retreat, and the economy is suffering,” with the nation’s gross domestic product increasing by its lowest amount for “any four-quarter period since 2001.”
Real personal consumption spending is estimated to have fallen a tiny bit (0.04 percent) over the four-quarter period. That is the first decline for that segment since 1991.
Another number worth noting is final sales to domestic purchasers, whether businesses, consumers or governments. That leaves out gains from exports, and it ignores changes in business inventories. It is down 0.1 percent on a year-over-year basis. Again, that is the first decline since 1991.
This recession, in other words, is already deeper than the 2001 downturn. And there are clear signs it is, or soon will be, worse than the 1990-91 recession as well.
If only consumer purchases were counted in G.D.P., it would have fallen at a 3.1 percent annual rate in the quarter. That is the worst quarterly performance in that regard since the second quarter of 1980. Then, in a desperate attempt to control inflation, the Fed imposed credit controls. Now we have credit controls imposed despite every attempt by the Fed to stimulate the economy.
A partial solution to what is happening may be contained in the numbers. Norris says that government spending kept the “overall quarterly decline … small” because it “added 1.1 percent to the growth rate.” Other factors — nonresidential construction and net exports — also helped, but neither are expected to keep up.
Government spending may be the key to keeping us from falling from a deep recession into a depression, but it will take a massive infusion of cash into state and local budgets, along with federal spending to jump start things.
That’s the point Govs. Jon Corzine and David Paterson made yesterday (see my post) and that the Star-Ledger made today in an editorial. Sending checks to taxpayers, which may have some political benefit, does little to prime the pump; what works best, as the Ledger writes, is public works projects and spending on healthcare.
The first economic stimulus plan — not to be confused with the recent $700 billion bailout constructed for the financial market — consisted primarily of sending checks to taxpayers over the summer. Now Congress is talking about another round. We agree with Corzine: Directing federal funds into infrastructure is the best way to stimulate the economy on a long-term basis. Creating jobs is preferable to another one- shot jolt that won’t last after the month’s bills are paid.
New York Gov. David Paterson asked Congress to increase the federal portion of Medicaid, the health program for the poor. Paterson appealed for more direct aid to states. The cash that Paterson asked for will be needed as states like New Jersey and New York struggle against projected multibillion-dollar deficits. As credit tightens, as layoffs increase and tax revenues dwindle, more citizens will need help that the states will be hard- pressed to provide.
Paterson’s plea has merit. But so does Corzine’s.
If there is going to be a new economic stimulus package, investing in infrastructure projects — with at least $300 billion, Corzine says — will quickly provide jobs and kick-start the economy in ways that will deliver long-lasting benefits.
It’s not about “make-work” projects (the Ledger’s phrase) — though, those may become necessary at some point — but about “making up for the infrastructure needs that have been left untended, and dangerously so, for far too long.”
We’re talking about road and bridge repairs, mass-transit expansion, new schools and libraries, broadband installation in areas not currently served and investments in green technologies. All of these things cost money, but all of them also put people to work and some will create new industries that will serve the nation well into the future.
The nation, unfortunately, has been mired in an intellectual morass, its political, financial and media elites wed to old ideas, to a conventional wisdom that appears to be in flux. People may still be skeptical of the government, but I sense that they are less skeptical of government than “the government” and that they have learned over the last eight years what happens when you let government atrophy and that a vibrant, well-functioning public sector is not only important but necessary for our health and well-being.
They are, I think, interested in a kind of Rooseveltian rebirth of the public sector, one that acts as a watchdog over the corporate order, provides a safety net for those who fall on hard times and steps in when the system is failing.
Roosevelt put people to work, but he also electrified the Tennessee Valley. He got the Hoover Damn built and hundreds and thousands of smaller projects (the Princeton Arts Council building was a WPA project). Government gave us the railroads, the highway system, bridges, tunnels — well, you get the picture.
It can do the same now, if we only let it.
