[Marxism] "Steep Slide in U.S. Economy as Unsold Goods Pile Up"

["Fred Feldman" <ffeldman@xxxxxxxxxxxxxxxx>]

http://www.nytimes.com/2009/01/31/business/economy/31econ.html

January 31, 2009
Steep Slide in U.S. Economy as Unsold Goods Pile Up 
By LOUIS UCHITELLE
The economy shrank at an accelerating pace late last year, the government
reported on Friday, adding to the urgency of a stimulus package capable of
bringing the country back from a recession that appears to be deepening. 

The actual decline in the gross domestic product - at a 3.8 percent annual
rate - fell short of the 5 to 6 percent that most economists had expected
for the fourth quarter. But that was because consumption collapsed so
quickly that goods piled up in inventory, unsold but counted as part of the
nation's output.

"The drop in spending was so fast, so rapid, that production could not be
cut fast enough," said Nigel Gault, chief domestic economist at IHS Global
Insight. "That is happening now, and the contraction in the current quarter,
as a result, will probably exceed 5 percent."

The dismal fourth quarter, and the likelihood of more of the same through
the spring, are fueling discussion among policy makers and politicians over
the best way to spend the soon-to-be-authorized federal money. 

Some caution that President Obama's proposals try to achieve too many
objectives - for example, broader health care coverage and energy efficiency
- at the expense of focusing tax dollars on the core issue of job creation.
By this argument, more should be spent on things like infrastructure repair,
either directly or by channeling money to the states for projects now
delayed for lack of adequate tax revenue. 

Others argue that the best bang for the buck would come from a stimulus
package devoted mainly to tax cuts rather than public investment. The
breakdown in the $819 billion bill that the House approved on Wednesday and
the Senate will take up next week is two-thirds spending, one-third tax
cuts. 

The president took a different approach in a press conference on Friday.
Seizing on the damaging fourth-quarter figures and the prospect of an even
weaker first quarter, he called the contraction "a continuing disaster" for
working families and pushed Congress to act quickly to provide relief. 

Even with the help of swelling inventories, the 3.8 percent contraction,
adjusted for inflation and representing all of the nation's economic
activity, was the largest quarterly drop in the nation's output since the
1982 recession.

Business investment, commercial construction, home building and exports all
fell steeply, most of them doing so for the first time since the recession
began 13 months ago. Data released this week suggested that the decline had
continued. As for consumer spending, in only one other quarter since records
were first kept in 1947 have final sales of goods and services produced in
America fallen so much. 

"Consumer spending is often held up as the engine of growth, and we are now
experiencing the second-largest contraction on record," said Ben Herzon, an
economist at Macroeconomic Advisers in St. Louis, referring to the 7.6
percent drop in spending in the midst of the 1974-75 recession, and 5.1
percent now.

Christina D. Romer, chairwoman of the president's Council of Economic
Advisers, said in a statement that "aggressive, well-designed fiscal
stimulus is critical to reversing this severe decline." She did not describe
the elements of a well-designed fiscal stimulus, but the vast majority of
the nation's economists agree that one is necessary, and soon.

Virtually none dispute that the usual route to recovery, cheap credit, has
failed to work this time - not when lenders are pulling back, despite
prodding from the Federal Reserve, and borrowers are focused more on paying
down debt and building up savings. 

"I'm hoping the fiscal stimulus will be a catalyst to reignite the private
sector," said Stuart Hoffman, chief economist at the PNC Bank Corporation in
Pittsburgh. "My hope is that as the fiscal stimulus kicks in, people will
begin to spend and invest more, modestly anyway, in the second half of the
year."

Absent a large stimulus package, most economists expect the nation's output
to shrink not only in the first half of the year, but in the second half as
well. In April, the recession would become the longest since the 1930s.
Until now, the record, 16 months, was shared by the severe recessions of
1974-75 and 1981-82. This one began in December 2007 as employment peaked
and began to fall. 

"We are in the thick of it now," said Robert Barbera, chief economist for
ITG Investment Technology Group. 

The Federal Reserve ended the mid-'70s and early '80s recessions by cutting
interest rates sharply to encourage borrowing and spending in the private
sector. This time, the credit crisis, rising unemployment, plunging home
prices and bank failures have disrupted that mechanism, particularly since
late summer. 

Indeed, until the fourth quarter, the nation's output had declined only in
the third quarter, falling by half a percent at an annual rate. The Fed, in
response to the accelerating decline, cut rates to nearly zero - a tactic
that in the past would have raised cries of loose money and rising
inflation.

The concern now, however, is deflation, or falling prices, and Friday's
report from the Bureau of Economic Analysis suggested that the fear had some
justification. Personal consumption expenditures, not counting food and
energy, rose at an annual rate of only 1.6 percent, the smallest quarterly
increase in years. If prices were to actually fall, consumers might respond
by putting off purchases until prices were even lower.

"My sense is that business is slashing hugely and across the board," said
Allen Sinai, president and chief global economist of Decision Economics.
"Everyone is cutting prices, people, capital spending and all kinds of
expenses. It is almost a herd instinct." 





________________________________________________
YOU MUST clip all extraneous text when replying to a message.
Send list submissions to: Marxism@xxxxxxxxxxxxxxxxxxx
Set your options at: 
http://lists.econ.utah.edu/mailman/options/marxism/archive%40archives.econ.utah.edu