Popular Economics Weekly
Don’t take the White House word for it. The huge amount of stimulus injected into the U.S. economy is working. Not only is second quarter gross Domestic Product (GDP) growth showing improvement—it contracted just 1 percent in the initial estimate, vs. 6.1 percent in Q1—but the unemployment rate actually fell to 9.3 percent from 9.4 percent.
Economists and analysts polled by the New York Times said that President Obama’s $787 billion stimulus plan had already added 1 percentage point to second quarter growth. As more of its job-creation spending kicks in, it could add as much as 3 percent to growth by the end of this year.
Direct government spending has worked the best. There is general agreement that tax rebates and tax cuts have done less, mainly being used to pay down debt. The latest Federal Reserve report on consumer credit showed that consumer debt decreased another 5 percent in June, and a total of 5.4 percent in the second quarter. This has put consumer debt totals back to 2007 levels. Consumers have been holding on to their wallets and purses until they see better times coming, in other words.
Chief of Staff Rahn Emmanuel said, "If you think about it, the first six months were spent rescuing the economy. Now the president is laying the groundwork for rebuilding the economy."
Non-farm payrolls decreased just 247,000 and have been decreasing at a 330,000 per month rate in Q2, compared to an average 645,000 per month decrease over the prior 6 months. Average hourly earnings have been rising 2.5 percent, but average hours worked is stuck at 33 hours per week, the smallest work week since World War II.
Even so, the credit markets are working so that auto and home sales are beginning to recover. The Cash for Clunkers program is but one example of the pent-up demand. Car sales rose to an 11 million unit annual rate just in July, where it has been languishing at 9-10 million over the past months.
Another sign of recovery was the June rise in factor orders. Orders for core capital goods, which are used by businesses to expand or update their productive capacity, rose for the second consecutive month by 2.6 percent. This is confirmed by the Institute for Supply Management July manufacturing report. The ISM survey reported that overall manufacturing activity jumped 4.1 points with most its components—including employment, new orders and prices—now above 50 percent, signaling manufacturing businesses are once again expanding.
The unemployment report is one of 4 indicators used to call the end of a recession. It probably confirms that the recession ended in July. In fact, this could turn into what is called a ‘V’ shaped recovery if past recoveries are a guide. Only the 1990 and 2001 recessions—under administrations that did not believe in government stimulus spending—had more prolonged and jobless recoveries. If the stimulus plan continues to perform as expected, we could see jobs as well as overall economic growth expanding by the end of the year.
Harlan Green © 2009