The Stuck Economy
THE United States economic recovery is in bad shape. Sixteen months after the 1990-91 recession ended, unemployment remains stuck at a high level. The July dip to 7.7 percent from 7.8 percent the month before was statistically insignificant. That decline may or may not be the start of a trend. But in previous recessions, the unemployment rate began to fall two months after the slump's end.
Nothing like the current behavior of the jobless rate has occurred in over 40 years.
Other fresh statistics show stagnation. The government's chief forecasting gauge, the Index of Leading Indicators, fell in June for the first time in six months. The Federal Reserve's "beige book" analyzing regional economics was gloomy. Real disposable personal income - income after taxes and inflation - fell at a 2.8 percent annual rate in June after increasing in three of the previous four months. Construction spending, seasonally adjusted, fell at a 16.9 percent annual rate in the same month.
Average hourly earnings in July were up 2.3 percent from 12 months ago. However, in the latest 12-month span, the consumer price index rose 3.1 percent. So most consumers are a bit worse off. No wonder that when shopping, many wait for a bargain.
We could also offer more cheery statistics. The economic scene is mixed, of course. But in general economists are describing the recovery as "weak" or "fragile." They are not impressed by the occasional cheerleading by President Bush or other administration officials, eager for an economic pickup that would boost Republican election prospects.
Actually, the Fed - not the president or Congress - should get most of the blame for the slow recovery. The Fed has failed to provide the economy with adequate funds to fuel a robust recovery. In the past three years, the measure of money known as M2 (currency, checking accounts, savings accounts, and money market accounts), has had the slowest growth in any period in 30 years. Fed officials offer technical reasons for this slow growth. But so far, anyway, the economy itself has reflected the meager supp ly of monetary fuel.
True, the tough times have reduced the inflation rate. Businesses also have managed to trim labor costs and boost productivity, often through massive layoffs. Productivity rose at an annual rate of 2.3 percent in the spring after a 3.8 gain in the winter quarter. Labor costs posted their smallest gain in 17 years.
But the Fed's mistake has caused a lot of economic misery and swelled the federal deficit. If stagnation helps shove the Democrats into the White House, it is doubtful they would reappoint Alan Greenspan as Fed chairman - if he still wanted the job. At its policy meeting today, the Fed should reduce interest rates to get M2 growing. The risk of further stagnation is too great.