About That Economic Recovery ...

Economic Recovery was the buzzword phrase on last Sunday's news shows, as the White House dispatched wonks to talk about the supposedly good news in the national economy. I'd like nothing more than to be able to join them, only there are too many reasons to be skeptical when you look deeply into the data. The DOW and the “official” unemployment numbers might say one thing, but more telling indicators are singing a different tune. 

 

According to the commerce department, consumer spending rose 3.4 percent in the first quarter of 2013 – great news in a consumption-driven economy. But that spending hasn't been driven by increases in labor participation or higher wages. It seems that much of it has been driven by credit and spent savings, behavior that economists have often described. 

 

During economic downturns, consumer confidence sinks and they tend to curb consumption, hoping to pad their savings in case they lose their job or take a pay cut (a natural response that nonetheless tends to make things worse as spending then drops off even further). If the economy doesn't improve, consumption remains depressed, continuing to put downward pressure on demand. However, in periods of prolonged economic gloom, there will often be a release of pent-up demand as consumers begin to acclimate to the new normal. 

 

Such bursts of spending are, in the short term, good for the economy, as spending can beget increased production, which can jump start employment. It's just that the initial spending is unsustainable, since it isn't based on recurring income, so if it doesn't get the motor started, it simply dies off. While spending was up during the first quarter, personal savings rates dropped by nearly as much, hitting their lowest level since before the recession, which lent credence to the idea that there's not much wind beneath the sales of this part of the “recovery.”

 

Another troubling indicator is the fact that home prices are once again rising. Obviously this is something that is usually seen as good news. However, because employment and wage increases aren't driving the market, but rather a long-term commitment to keeping interest rates at artificially low levels, this too is not something that can be sustained long-term. 

 

It also puts us in a difficult predicament because if homeowners are once again tapping home equity for disposable income, or buying houses at inflated prices because a monthly payment at such low rates will cover greater purchases, we risk another bubble at any point that interest rates rise – the exact thing we'll need to happen if savings rates are to increase.

 

Our economy is experiencing a lot of systemic problems and it's not easy to address multiple issues at the same time – high-debt loads, low savings rates, underemployment, depressed consumer demand, etc. – as they often have contradicting remedies. But at the end of the day, 70 percent of our economy is driven by consumer spending. 

 

Until more Americans are employed and increases in productivity begin to translate into higher wages that give workers more money to spend into the economy, there simply isn't that much to celebrate. We can debate what is the best way to accomplish such goals, but had better be careful about declaring any major victories before those things happen.