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Smith Faculty
Opinion Article |
August 31,
2006 |
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By Dr. Peter Morici, Professor of
International Business
EMAIL
WEB SITE |
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Personal Income up
$60.2 Billion in July Recession Is a
Risk
Today, the Commerce Department
reported in July personal income
increased $60.2 billion or 0.5 percent,
disposable personal income increased
$63.9 billion or 0.7 percent, and
personal consumption expenditures
increased $78.7 billion or 0.8 percent.
The price index for personal
consumption expenditures, including food
and energy, increased 0.3 percent in
July and was up 3.4 percent from July
2005.
The Federal Reserve closely watches
the price index for personal consumption
expenditures, less food and energy. This
core price index increased 0.1 percent
in July, as compared to 0.2 percent in
June. In July, the index was up 2.4
percent from July 2005.
The moderate July increase in core
inflation should not be viewed as a
trend. The residual effects of first
half oil price increases continue to
work through markets, and August and
September inflation data may be less
encouraging.
Slower growth and rising consumer
prices will leave Ben Bernanke with
tough choices. Moderating oil prices and
slower employment growth will temper
inflationary pressures but that process
will take a few more months. Pressures
within the Federal Reserve policymaking
apparatus may mount to further increase
interest rates, but more tightening will
affect commodity and labor markets with
too much lag and only risk turning the
slowdown into a recession
Significantly, personal outlays
exceeded disposable income by $83.5
billion in July, as compared to $67.6
billion in June.
The savings picture continues
worrisome. The savings rate personal
savings as a percentage of personal
disposable income was minus 0.4, 0.5,
0.8, 0.7, and 0.9 percent in March,
April, May, June, and July,
respectively. Savings have been negative
for more than a year.
Although consumers continue to spend,
imported petroleum is taking a bigger
bite, and Americans are buying more
foreign cars and trucks. These purchases
reduce the demand for U.S. made goods
and services from steel to software to
salsa.
The downsizing of General Motors and
Ford is a terrible drag on the economy.
A greater share of the foreign
nameplates sold in the United States is
assembled in Asia and Europe. Even when
vehicles bearing foreign nameplates are
assembled in the United States, they are
made with fewer U.S. components and
labor than U.S. brands. The workers
employed in transplant factories earn
lower wages and receive fewer benefits
than those employed at GM, Ford and
Chrysler.
The slowing housing market and
tougher credit card terms should further
break consumer spending. Hence, despite
strong profits, business investment is
weak, and corporations are using profits
to buy back shares rather than rapidly
expand their U.S.-based enterprises. The
U.S. market is just not expanding very
rapidly, and with household savings
negative for more than a year, consumer
demand will grow slowly.
Overall, rising petroleum prices, the
flagging competitiveness of U.S.
automakers and higher interest rates are
slowing the economy.
With savings so low, higher interest
rates, especially mortgage rates, could
cause an abrupt change in consumer
behavior. A sharp increase in savings
could throw the economy into recession.
The risk of recession is apparent.
The Fed should not raise interest rates
further. Sometimes the best monetary
policy is to do no harm.
Peter Morici is a professor at the
University of Maryland School of Business
and former Chief Economist at the U.S.
International Trade Commission.
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