finance: 8/29 WSJ.com: Real Time Economics

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WSJ.com: Real Time Economics

Economists React: What's Next After Cash-for-Clunkers Boost?
August 28, 2009 at 10:19 am

Economists react to July’s 0.2% increase in consumer spending and flat personal income:

The cash-for-clunkers incentives boosted consumer spending in July and will give an even bigger kick in August. But, aside from that, consumer spending is still subdued. Incomes remain weak, showing no change in July, although there was one encouraging signal in that wage and salary income edged higher, its first monthly increase so far this year. But the labor market is still shedding jobs. When given sufficient incentive (as in cash-for-clunkers) consumers will spend. But reduced wealth, high debt, tight credit, and a weakening labor market are all weighing on consumers. Consumers remain a missing link in hopes for strong recovery. — Nigel Gault, IHS Global Insight

Cash for clunkers lifted spending into positive territory in July. However there was noticeable offset in other discretionary categories so that the overall gain was fairly modest. Government estimates of cash for clunkers sales in August suggest an even more substantial gain in auto sales, which should confirm a solid gain for [the third quarter] as a whole. However the weakness in income highlights the fragility of these gains. Given no further boost to income from the stimulus package on the horizon over [the second half of 2009] we expect consumer spending to remain fairly subdued. — Julia Coronado, BNP Paribas

Households are still facing further declines in net worth as house prices continue to fall, though rising stock prices have provided somewhat of an offset, and household debt burdens remain high even as households pare down credit card debt. In this atmosphere, the fuel for growth for consumer spending is looking less and less potent -– while clunker cash will provide a boost to the [third-quarter] spending data, the reality is that clunker cash is, at least ultimately, a nonsustainable fuel for U.S. consumer spending. Restrained growth in consumer spending beyond Q3 is one factor behind our expectation that what will be fairly rapid real GDP growth in Q3 will not be sustained in subsequent quarters. — Richard Moody, Forward Capital

With the end of the Cash-for-Clunkers incentive in August we may yet see a dip in auto purchases in the September auto sales numbers. Other durable goods purchases will get some support later this fall when the much smaller, $300 million, rebates for appliances program engages in November. — Robert Dye, PNC

To me the real story in the report were the income numbers. While disposable personal income, which is what we have left after the government gets its share, was essentially flat, wages and salaries actually increased. With all the layoffs, businesses had been cutting back on their payments to workers. Therefore, the increase is a very positive sign. — Joel Naroff, Naroff Economic Advisors

Secondary Sources: "TBTF" Banks Now Even Bigger; The Real Cost of Running; Pawlenty Lambasts Stimulus; Fed's Rep at Stake
August 28, 2009 at 8:17 am

A roundup of economic news from around the web.

-Banks "Too Big To Fail" Have Grown Even Bigger: An article by David Cho in today's Washington Post points out that "When the credit crisis struck last year, federal regulators pumped tens of billions of dollars into the nation’s leading financial institutions because the banks were so big that officials feared their failure would ruin the entire financial system. Today, the biggest of those banks are even bigger. […] The federal bailouts only reinforced the thought that government would save big banks, no matter how horrible their decisions."

-Running's Hidden Costs: Justin Wolfers, a prolific young economist and professor at the University of Pennsylvania's Wharton School, has raised heckles at Runner's World after arguing on NPR recently that while running is touted as a cheap form of exercise, "the true cost of something is the alternative you have to give up. So each hour that I spend running is an hour that I don’t spend hanging out, working, or sleeping." Mr. Wolfers, a marathoner who is currently training for the Marine Corps marathon, said "By my calculations my 16-week training program comes at an opportunity cost of several thousand dollars." Yet for him, running, he says, is still a "no-brainer".

-Pawlenty: "Ludicrous" to Claim Stimulus Pivoted Economy: Republican Minnesota Governor Tim Pawlenty said in an interview taped for Bloomberg Television that with only 15-20% of the administration's $787 billion stimulus money spent, it "would be ludicrous to claim" the package is "what pivoted" the nation's $14.1 trillion economy towards "a potential beginning of recovery." The money was "misdirected" and "largely wasted" on projects that won't create jobs, the possible 2012 Republican presidential candidate said. Bloomberg points out the governor's own economic development director, Dan McElroy, has been traveling the state touting the benefits of Minnesota stimulus projects funded by federal money.

-Fed Up: In an article for Washington Monthly, James K. Galbraith reviews David Wessel's bestselling book "In Fed We Trust", noting the book's strengths in documenting the crisis but concluding that "There is a larger book, as yet unwritten for which In Fed We Trust will prove a valuable source…to take on the questions that merely frame the narrative here." Those questions include: Did the system actually survive? Did the Bernanke-Paulson-Geithner measures actually work? And ultimately, "Did Ben Bernanke's academic commitment to Milton Friedman's monetarist principles (including 'inflation targeting') render him unable to raise warnings, to see dangers, and to take action early enough? […] Is the Age of Delusion over yet?"