Mediocre growth, but, hey, the savings rate is up!

July 31, 2010

Americans say they are underwhelmed by the economic recovery, and yesterday’s report of 2.4% growth in the second quarter met their expectations. A recovery that should be accelerating after the long and deep recession has instead downshifted into slower growth.

About the best that can be said is that the report showed no signs of a looming “double dip” recession. Domestic demand was strong enough to suck in a burst of imports, which rebuts the Keynesians who are predicting another depression. Investment and business spending were strong, thanks to inventory rebuilding and some comeback in housing and commercial real estate. Disposable income also grew at a 4.4% annual rate, with less than half of it coming from government transfer payments.

Savings by households also increased again, to above 6%, which is back to the range of the early 1990s and is a healthy sign. The great deleveraging that began with business last year is now continuing with consumers. While some economists fret that this is bad for consumer “demand,” savings don’t vanish from the economy. They are recycled into lending and investment that can drive future growth if businesses see the right opportunities and have enough confidence.

The irony is that businesses and consumers have been fixing their balance sheets even as the government has been doing the opposite. States and localities have deficits of nearly $100 billion, while the federal hole will be close to $1.4 trillion for the second year in a row.

This implies higher taxes, which Democrats in Washington are promising to deliver on January 1, and that’s only the first installment. So just as Americans are putting themselves in the financial condition to start investing and spending more robustly, the Obama Administration will suck tens of billions out of the private economy. This is not the way to nurture a recovery that is weaker than it should be.

The 2.4% growth rate is especially disappointing coming after the previous two quarters of 5% and 3.7% growth. Yesterday’s report also contained the government’s annual historic GDP revisions, and growth was revised downward for the last three years. This means the U.S. is $130 billion, or 1%, poorer than previously thought and that growth will have to be that much faster to catch up.

A robust recovery would be building momentum, especially with historically easy monetary policy continuing. Instead this one is plodding along at a rate that won’t create enough new jobs to sharply reduce the 9.5% unemployment rate. The Obama Administration, in its Keynesian confusion, is simultaneously saying the economy is so weak it needs more spending “stimulus” but also strong enough to absorb a huge tax increase.

Read more at: http://online.wsj.com/article/SB10001424052748703999304575399490468359832.html?mod=WSJ_Opinion_LEADTop

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