— and it’s much weaker than the headline number suggests (and MUCH weaker than the previous quarter, even though the growth rate was the same.) It’s not just that final sales fell, so that the economy grew only because of inventory accumulation. If you look at consumer spending, purchases of goods actually fell substantially. Only service purchases rose — and much of that was housing and medical care. As Michael Mandel at Business Week has pointed out, those aren’t “really” consumer decisions: housing “consumption” is largely imputed rents on owner-occupied homes, and medical care is mostly paid for by insurance.Vincent Del Guidiee reports in Bloomberg that what spending there has been has been based on increased credit card debt, and
By category, revolving debt such as credit cards rose $6.3 billion during March and non-revolving debt, including auto loans, increased $9 billion for the month, according to the Fed's statistics.But consumers can't sustain that. They can't make the credit card payments.
Overdue payments at the six largest U.S. credit-card lenders reached the highest since November 2004, according to data compiled by Bloomberg. An average of 4.11 percent of loans were at least 30 days late in February and March, according to reports filed by American Express Co., Bank of America Corp., Capital One Financial Corp., JPMorgan Chase & Co., Citigroup Inc. and Discover Financial Services.So consumers reduced the spending they chose to make on goods, leaving merchants with more unsold goods in the warehouse. What goods consumers did buy were largely purchased on high-interest credit cards that consumers are having greater difficult paying.
As I've said before, this is a consumption-based recession. Consumers do not have enough money to increase consumption. George Soros has a new book out, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means and he was discussing it on the Diane Rhem Show this morning. He describes a three-decade bubble that has been based on the dollar as the world's reserve currency.
This corresponds roughly to what I have observed - that workers have not gotten a real pay raise since 1970 so that all increased expenditures by consumers since then have been based on first - the non-working spouse going to work, second - the increased use of credit cards and debt by consumers, and third - the use of home equity as a resource to borrow against. During this same period, all the rewards for increased productivity have gone to the wealthy who do not spend it on consumption.
Soros also points out that this period has been characterized by deregulation of financial institutions and markets along with easing of credit. Soros also says that the deregulation has been a result of the mistaken assumption that economics uses - that markets tend to move towards equilibrium. Instead, he says, deregulation of financial institutions invariably causes extreme boom-and-bust cycles.
The Dot.com bubble was one, as was the housing bubble. But Soros says that there has been an overall bubble that has encompassed those bubbles, and the overall bubble is what is now coming to its end. If this is true, then the fiscal and monetary solutions that mitigated the dot.com and housing bubbles will not work this time.
Since the Fed has already lowered interest rates so low that no further lowering will have any effect other than to increase inflation, Soro's explanation may be a good one. Unfortunately, that means that the American economy is going to be restructured to meet new demands, and that means time and disruption.
I am describing what he said this morning on Diane Rhem. I have not yet read his book, although Barnes & Noble have already charged me for it. Unfortunately I do not recall his solutions. But I present this because it confirms my belief that this recession is going to last a while. As usual, the optimistic statements from the Bush administration are not to believed. It will NOT be resolved this year or next.
The next few years are going to be difficult ones economically. Until workers start getting real wage increases, all the financial manipulations are going to go for nought. They are primarily ways of spending tomorrow's income today, and now we are seeing that much of what we were spending and depending on repaying tomorrow isn't going to be there to make payments from.
One final comment - the conservative free marketers will propose giving more money to banks and businesses so they can create more jobs. But this is a Recession caused by a shortage of consumption, not by a shortage of investment. There is plenty of money for investment! Businesses are cash-rich - and have been since 2001 - because they have too few good opportunities for investment inside the U.S.
The current Recession - the worst since the Great Depression - is in part a direct result of the union-busting that has been permitted since Reagan broke the Air Traffic Controller Union. This has had the result of shifting all the profits from increased productivity from workers to the investors. Since the workers need income to act as consumers, the economy is damaged when workers don't share in the increased productivity of businesses where they work.
There is no quick way to solve the current economic problems. The economy is going to have to be restructured before there is a turn-around. That's going to take a while. Years.
The bill for the Reagan Revolution has come due, and its a big one, with no benefits for anyone except the very wealthy who mostly inherited their money instead of earning it.