Monday, June 29, 2009

Are The Positive Economic Signs Artificially Created?

Could the signs of economic improvement be a mirage created by the artificial propping up of the economy by unprecedented government intervention? James Picerno from The Capital Spectator explains why we should be suspicious of numbers like the 1.6% increase in disposable personal income.

One day we'll look back on 2009 and wonder what all the confusion was about. All will become clear and we'll know when the recession ended, when the bull market began anew and how and why the cycle turned. Meanwhile, we're wondering if the data du jour can be trusted.

Judging by the numbers of late, clarity is upon us, or so it seems. Income and spending are up among consumers. What's not to like? If this keeps up, we'll be back to the good old days by, oh, let's say the third week of September.

As for what we know today, disposable personal income jumped 1.6% last month on a seasonally adjusted basis, the Bureau of Economic Analysis reports this morning. That's the biggest monthly gain in a year. Not bad for what we've repeatedly been told is the deepest recession since the Great Depression.

That's only half the fun. The government also advises that personal consumption expenditures gained 0.2% in May, the best since February.

Is it a miracle? No, it's just your tax dollars at work. As the BEA noted in its press release today, "the pattern of changes in personal income and in DPI reflect, in part, the pattern of increased government social benefit payments associated with the American Recovery and Reinvestment Act of 2009." In other words, the guys and gals in Washington continue to print money and distribute it, creating a revival that otherwise doesn't exist. The extent of the government's intervention can be surmised once we recognize that wages and salaries actually fell by 0.1% last month.

There are two ways to interpret the news. The optimistic view is that the government's stimulus efforts will steady an otherwise anxious consumer. By putting more money into his pocket, the incentive to spend is heightened and the odds improved that a return to old consumption habits is near. The government payments are a bridge until the day when the private sector can resume more of the burden of financing consumption.

The darker view is that government-financed consumption is a tenuous lifeline that's a pale replacement for the real McCoy. As such, the burning question is one of asking when the labor market will revive? By that standard, there' still reason to be cautious about the remainder of 2009. The recession may be technically over, as we've discussed. But even making that leap of faith offers no short cut to good times.

The job market, after all, is typically the last to show convincing signs of recovery. For that reason, the National Bureau of Economic Research shuns employment trends for putting official dates on business cycle turning points. Minting new jobs, in other words, is usually the response to other economic stimuli. Conventional recoveries, then, don't begin with the labor market. Then again, this isn't a conventional business cycle.

Clearly, the government has moved heaven and earth to keep the economy afloat. Ours is an era of triumph for public-financed consumption. In both magnitude and timeliness, no government has ever acted with greater speed and depth in keeping the forces of contraction at bay. But that raises a question of whether Washington can keep the engineered consumption going long enough to wait for a bonafide economic recovery. We'll have an answer, perhaps soon. But at the moment we're still knee-deep in the first great macroeconomic experiment of the 21st century.

This blog post can also be viewed at The Capital Spectator.

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