Friday, May 30, 2008

Not Much Comfort in Stimulus Payments

The decline in economic activity in the United States is confirmed by the recent GDP data. Spending went up ever so slightly in the first quarter, but consumers and businesses got less for their money because of higher prices for energy. Business spending looks positive only if you are impressed at businesses “investing” in larger inventories — like all those houses builders keep building that may take five years to sell.

Some experts are saying they can see the effect of the stimulus payments in April retail sales, but I am having trouble seeing it myself. To my eye, the jump up in sales last month is not quite as big as the jump up in prices of energy and food. So again, people are spending more and getting less. You can call that inflation, but you can’t call it an increase in economic activity. And here’s another version of the story: during the recent holiday weekend, drivers drove fewer miles than last year, according to two estimates I read, but still set a record for spending money on gasoline, which has gone up in price for 22 straight days.

The treasury says it has made $50 billion in stimulus payments so far, so it’s not too soon to look at where the money is going. AP put together a roundup of consumer and expert reaction that’s worth looking at, if only to confirm what almost everyone had expected.

The stimulus payments were supposed to make consumers feel better about spending, yet by most accounts consumer confidence is the lowest it has been in a generation. The feeling seems to be, we are “just keeping up” this month, but what about next month?

The silver lining in the current situation is that energy and food prices cannot keep rising as fast as they have been rising so far this year. There is a tough period of adjustment ahead, but the current crisis is not the beginning of the end.