Concern About the US Economy

It’s midyear 2011, and experts have begun to worry that the United States might not be able to overcome stagflation, which in the long run could lead to deflation.
Concern About the US Economy
RISING PRICES: People walk through a mall last month in New York City. Fears of stagflation in the U.S. economy are on the rise. Stagflation happens when the economy has slow growth, unemployment has risen to record heights, and prices are rising, or the country is in an inflationary stage. (Spencer Platt/Getty Images)
7/5/2011
Updated:
10/1/2015

<a><img src="https://www.theepochtimes.com/assets/uploads/2015/09/mall_117527079.jpg" alt="RISING PRICES: People walk through a mall last month in New York City. Fears of stagflation in the U.S. economy are on the rise. Stagflation happens when the economy has slow growth, unemployment has risen to record heights, and prices are rising, or the country is in an inflationary stage.   (Spencer Platt/Getty Images)" title="RISING PRICES: People walk through a mall last month in New York City. Fears of stagflation in the U.S. economy are on the rise. Stagflation happens when the economy has slow growth, unemployment has risen to record heights, and prices are rising, or the country is in an inflationary stage.   (Spencer Platt/Getty Images)" width="320" class="size-medium wp-image-1801368"/></a>
RISING PRICES: People walk through a mall last month in New York City. Fears of stagflation in the U.S. economy are on the rise. Stagflation happens when the economy has slow growth, unemployment has risen to record heights, and prices are rising, or the country is in an inflationary stage.   (Spencer Platt/Getty Images)
It’s midyear 2011, and experts have begun to worry that the United States might not be able to overcome stagflation, which in the long run could lead to deflation.

“With inflation rising and GDP forecasts continuing to be revised downward, fears of stagflation have crept back into the economy, with the economy hovering in a dangerous position between two possible outcomes: recovery or crash,” said Anthony B. Sanders, professor at George Mason University, in a commentary on the Mercatus Center website.

Piping in to deflect the unpleasant news, one respondent to the professor’s comments said that deflation wouldn’t happen because the U.S. Federal Reserve (Fed) will continue to print money.

Well, not so fast. Another respondent suggests that if money is hoarded or saved at a higher rate than the Fed prints it, even if it pumps out money around the clock, deflation can still happen.

Stagflation happens when the economy has slow growth, unemployment has risen to record heights, and prices are rising, or the country is in an inflationary stage.

Inflation happens when prices are shooting up, and people can’t afford to go on a shopping spree because the dollar has become worthless, or the consumer has to pay more for the same product that cost less a few days ago.

Deflation happens when price levels decline, not because of competition, but demand for a product has decreased due to layoffs, reduction in wages, and especially due to continued decline in real estate values. Basically, firms are reducing prices in an effort to get people through the door.

Signs of Economic Upheaval

“There’s no doubt about it, the second estimate for GDP growth for 1Q2011 came in with a pale 1.8% rate, down from 4Q2010’s happier 3.1%,” announced the June 2011 Economic Situation report, published by the Mercatus Center, the George Mason University think tank.

Gross Domestic Product (GDP) is the market or monetary value of total goods and services produced in a country during a given year. GDP includes all private (consumer) and public (government) sector spending, including export values minus import values and investments.

An increase in GDP represents economic growth, and a decrease in GDP results in a recession. Any prolonged decrease of GDP due to an excessive number of business bankruptcies and protracted unemployment results in a depression.

From 1947 to 2010, the average quarterly GDP growth was around 3.3 percent. Then, in March 2011, GDP was 1.8 percent, a decrease of 1.3 percent from fourth quarter 2010.

The first quarter 2011 GDP decrease was a result of a significant increase in imports and an increase in overall spending on those imports by the public, as well as the industrial and government sectors. Experts suggest that the increase in overall spending on imports may be the result of increased prices in energy and other sectors.

Snapshot of What Affects the Economy

“An impaired provision of credit by banks could have severe amplifications on real economic activity and inflation,” a European Central Bank Working Paper suggests.

Deposits and loans are included in the GDP. Bank lending affects corporate ability to buy capital goods, expand, and hire. A slowdown in bank lending has a detrimental effect on a country’s GDP, as spending, which is a component of GDP, is reduced.

Bank lending has decreased significantly. In the first quarter of 2011, average loans decreased by 7 percent over the prior quarter. For example, lending activities by the Bank of America N.A. decreased by 5.9 percent. Wells Fargo Bank N.A. showed a 12.6 percent decrease—the largest decline in lending. Citigroup Inc. reported a 7.6 percent decrease in lending.

“The lack of total loan growth in recent bank results is undeniable. … Banks’ willingness to lend has improved in recent periods, but still remains a constraining factor at this point in time,” stated the June 14 Fitch Inc. ratings report, published on the Politico website.

The industrial production growth rate, another factor in the GDP saga, is the total output from manufacturing, mining, and utilities. The numbers that comprise this statistic are compiled by the Fed. A high industrial growth rate could result in the Fed raising interest rates to address possible inflationary pressure.

The U. S industrial production rate for consumer goods was almost flat, with just a .1 percent increase during May over April. Even the months before May didn’t show much movement in the production growth rate. Motor vehicles and parts showed a steep decline, although not for economic reasons, but because of Japan’s earthquake.

What ails many industries is a “lack of new orders,” suggests the Mercatus Economic Situation report.

Next...Breaking Economic Issues Into More Detail

Breaking Economic Issues Into More Detail

One major concern is gasoline prices, given the limited public transportation for people living in the suburbs.

Since 2008, average gasoline prices have risen from a low of $1.59 per gallon to $3.71 on June 13. A little breather occurred by June 20, when the average gasoline price edged down a smidgen to $3.652 per gallon, according to the U.S. Energy Information Administration. Overall, energy prices snowballed from just one year ago, with the energy index increasing by 21.5 percent since May of last year.

“The average family now spends 5% of its income on gasoline. The share was 2% two years ago. The collective increase means there is less to spend on other things,” according to the Mercatus Center Economic Situation report.

In May, the food price index rose by .5 percent over the prior month in major U.S. grocery stores, according to the latest Bureau of Labor Statistics (BLS) press release. The reason was that food prices increased and consumers’ purchasing power decreased; the consumer had less money to spend on other products as food was needed for survival and could not be substituted for anything else.

During May, all other consumer goods, including shelter, apparel, and household goods, increased by .3 percent, which is the highest since 2008. On a yearly basis, the upsurge for consumer goods was even more noticeable, increasing from 1.1 percent to 3.6 percent.

The unemployment rate is worrisome, hovering around 9.1 percent over the past several months. Yes, certain sectors are hiring, such as the health care, mining, and professional and business services sectors, with the latter including accounting and computer system design. On the other hand, the BLS reported 1,599 mass layoffs, or 143,540 people still being laid off in May, equalizing the hiring/losing jobs equation. In short, this means that job gains in one industrial sector were offset by job losses in another sector.

“When we received April’s strong reading on employment growth, 244,000 workers added to payrolls nationwide, Antony Davies at Duquesne University, commented that at that rate, it would take 16 years to return to the employment level of December 2007,” stated the Mercatus Center in its Economic Situation report.

According to Davies, for a standard labor force growth, about 200,000 jobs have to be created monthly, while for April 2011, the job gain was only about 44,000 jobs.

Business Leaders Chime In

“The CEOs of America’s largest companies anticipate higher sales and plan to increase capital expenditures and hire more workers over the next six months,” according to a Business Roundtable June press release about its Second Quarter 2011 CEO Economic Outlook Survey.

Of the surveyed CEOs, 87 percent expect increased sales, that is, more orders coming in, during the coming six months and going into 2012. Given that increase, these CEOs (51 percent) will hire more people and start addressing equipment needs for expanded operations. Therefore, more than three-fifths of the CEOs will increase spending for capital equipment.

Although the second quarter 2011 positive survey responses look promising, it has shown a downward trend from the first quarter. During the first quarter, 92 percent of the same respondents, 5 percent more than during the second quarter, were expecting an increase in sales.

[]Academia’s Economic Assessment[/b]
“The latest economic reports show the U.S. recovery has faltered,” begins an article on the Knowledge@Wharton (KW) website, a publishing arm of the University of Pennsylvania.

Experts suggest that the economy won’t recover unless the real estate market rebounds, with housing prices going up instead of down. “To have a vibrant recovery and economic expansion, housing has to go from ‘being a headwind to a tailwind,’” said Mark Zandi, chief economist of Moody’s Economy.com, in the KW article.

Besides, exports of American goods and services have to climb at a much greater rate to make a dent in the economic state of affairs. In April 2011, U.S. exports amounted to $175.56 billion, a 1.3 percent increase over March and 4.9 percent increase over February. This export growth is much too small to address economic realities.

Consumer confidence in the economy is at an all-time low, and the article suggests that there won’t be any change until the U.S. government addresses the deficit. The U.S. trade deficit rose from $375 billion in 2009 to $498 billion in 2010, a 32.8 percent increase.

Not many consumers are buying into the U.S. government’s contention that stimulus spending and lowering interest rates will enable an economic recovery, as it just benefits those who were the culprits in the economic mess. As of June 10, of the $787 billion allocated under the American Recovery and Reinvestment Act, $654.4 billion was distributed through tax benefits, contracts, grants, loans, and entitlements.

“Given the many problems afflicting the economy, a vibrant recovery could be years away,” the KW article warned.