Consumer spending up, but recession still a threat

From Reuters:

WASHINGTON – U.S. consumer spending rose
at its fastest pace in five months in July, backing views the
economy was not falling back into recession, although pending
sales of previously owned homes fell.

The Commerce Department said on Monday consumer spending
increased 0.8 percent on strong demand for motor vehicles,
after slipping 0.1 percent in June.

Economists had expected spending, which accounts for about
70 percent of U.S. economic activity, to rise 0.5 percent.

When adjusted for inflation, spending rose 0.5 percent last
month, the largest gain in 1-1/2 years and the first increase
since April.

While that’s good news, a double-dip recession is still a very real danger. The sovereign-debt crisis in Europe continue to play out, and seems destined to result in at least one and possibly more defaults. The recent brinksmanship in Washington has raised doubts both here and abroad about the sophistication and sense of responsibility among much of our elected leadership. And while corporate profits and corporate cash holdings remain at record highs, that’s dead money taken out of circulation.

As a story in today’s Wall Street Journal puts it:

Economists at JPMorgan, in their weekly reprise of economic developments, blamed the recent global stock selloff on “a sense of policy paralysis in the U.S. and Europe, which has driven home the point that there is no cavalry to ride to the rescue.”

“Fiscal policy has turned restrictive and an additional sharp tightening lies just ahead in the U.S., while monetary authorities have exhausted much of their ammunition,” they said.

Officials on both sides of the Atlantic who orchestrated the response to the global financial crisis insist the world economy would have been worse had they not acted as they did. But it’s clear that the remedies didn’t deliver the recovery for which they hoped.

Some economists, among them Harvard UniversiItty’s Kenneth Rogoff, say today’s painfully slow economic growth is the inevitable result of the massive head winds that follow a recession caused by a banking and financial crisis. Government policies, given already heavy burdens of debt on governments in the U.S., Europe and Japan, can’t overcome the relentless efforts of households and banks to reduce their debt loads.”

It would be fascinating to read how future historians and economists analyze this era and the decisions made by government and business leaders.

– Jay Bookman