Consumer Spending Down, Recession Looms?

Popular Economics Weekly

Wow! First-quarter GDP was paltry enough at 0.7 percent but consumer spending was even more paltry, at only 0.3 percent for the most embarrassing annualized pace since 2009. Unemployment is unusually low and consumer confidence unusually high making the results difficult to explain.

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Graph: Econoday

Could it be that nothing is happening in Congress and the White House on all those promised initiatives? The 5-month budget agreement left all spending priorities in place for the rest of this fiscal year (i..e., until September). That meant no money for a border wall, no defunding of Obamacare (as promised), or Planned Parenthood, or cuts in the EPA budget that protects our environment.

All the post-election euphoria for change hasn’t translated into actions, in other words. So, consumers may be keeping their powder dry, as their savings rate rose 0.2 percent to 5.6 percent.

Another worrisome indicator is almost no inflation, as core Personal Consumption Expenditure prices had the weakest showing in 16-1/2 years, according to Econoday. Core PCE prices fell 0.1 percent to take down the year-on-year rate by a sizable 2 tenths to 1.6 percent.

And if there’s no inflation, or falling inflation, it means there’s falling demand, which means falling profits. And that’s when a business cycle ends. So unless Congress and the Trump White House decide to stop playing with people’s minds on repealing Obamacare, or trying to pass a budget that cuts taxes for the wealthiest, while cutting benefits to seniors and the sickest, we could see a looming recession.

The ineptitude of government is at the moment startling. The budget agreement leaves everything in place, which includes, thanks to the Washington Post’s Daily 202:

1. There are explicit restrictions to block the border wall, but final agreement goes further, putting strict limitations on how Trump can use new money for border security (e.g. to invest in new technology and repair existing fencing). Administration officials have insisted they already have the statutory authority to start building the wall under a 2006 law. This prevents such an end run.

2. Non-defense domestic spending will go up, despite the Trump team’s insistence he wouldn’t let that happen. The president called for $18 billion in cuts. Instead, he’s going to sign a budget with lots of sweeteners that grow the size of government. Mitch McConnell made sure $4.6 billion got put aside to permanently extend health benefits to 22,000 retired Appalachian coal miners and their families.

Nancy Pelosi made sure $295 million was included to shore up Medicaid in Puerto Rico. Chuck Schumer got $61 million to reimburse local law enforcement agencies for the cost of protecting Trump when he travels to his residences in Florida and New York. There is also another $2 billion in disaster relief money for states, which bought a couple votes. (Kelsey Snell, our lead budget reporter, has more examples.)

3. The administration asked to slash spending at the National Institutes of Health by $1.2 billion for the rest of this fiscal year. Instead, the NIH will get a $2 billion boost – on top of the huge increase it got last year. Republican appropriators who care about biomedical research, including Rep. Tom Cole (R-Okla.) and Sen. Roy Blunt (R-Mo.), delivered.Trump also failed in his efforts to cut money for other kinds of scientific inquiry. For example, he proposed defunding the Advanced Research Projects Agency–Energy. Instead, it is getting a $15 million increase.

4. Trump fought to cut the Environmental Protection Agency by a third. The final deal trims its budget by just 1 percent, with no staff cuts. As part of a compromise, the EPA gets $80 million less than last year, but the budget is $8 billion.

5. He didn’t defund Planned Parenthood. Despite the best efforts of social conservatives, the group will continue to receive funding at current levels.

6. The president got less than half as much for the military as he said was necessary. Trump repeatedly prodded Congress to increase military spending by $30 billion. He’s getting $12.5 billion, with an additional $2.5 billion if/when he delivers a detailed plan on how to defeat the Islamic State.

7. Democrats say they forced Republicans to withdraw more than 160 riders. These unrelated policy measures, which each could have been a poison pill, would have done things like get rid of the fiduciary rule and water down environmental regulations. On the other side of the ledger, this budget blocks the Justice Department from restricting the dispensing of medical marijuana in states where it has been legalized.

8. To keep negotiations moving, the White House already agreed last week to continue paying Obamacare subsidies. This money, which goes to insurance companies, reduces out-of-pocket expenses for low income people who get coverage under the Affordable Care Act. The Trump administration justifies giving up on this because of the potential to resolve the bigger issue by repealing Obamacare.

Need we say more?  If ideology trumps common sense; such as the promised $1 trillion infrastructure bill, we can see the confidence balloon also lose its air. Then watch out below, as I’ve said.

Harlan Green © 2017

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

About populareconomicsblog

Harlan Green is editor/publisher of PopularEconomics.com, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
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