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Terence Smith analyzes the troubled U.S. economy with three economics experts.
There were more indications today that the faltering U.S. economy shows few signs of regaining its step. Consumer confidence fell for the fourth month in a row to its lowest level since November. Also today, the government reported that last year the U.S. poverty rate increased a fraction to 11.7 percent, rising for the first time in eight years, and median household income declined 2.2 percent. And while the Federal Reserve left interest rates unchanged at its meeting today, it issued a statement that said "Considerable uncertainty persists" about the economy, "owing in part to the emergence of heightened geopolitical risks." On Wall Street, the bears continue to growl, with the tech-heavy NASDAQ at a six-year low, and the Dow Jones Industrial showing little signs of a rebound.
Here to help us make sense of it all are William Spriggs, an economist and director of the National Urban League Institute for opportunity and equality, a Washington-based research group. Nancy Kimmelman is chief economist at SEI investments, a management firm. And Ellen Frank, professor of economics at Emmanuel College in Boston. Welcome to all of you.
Nancy Kimmelman, what do you make of all this gloomy news, what does it say to you about the general state of economy?
Well, the economy was in recession last year and as a result of that the poverty rate increased and incomes fell. This year the economy would seem to be in a state of recovery phase. It's not unnatural in a recovery phase for there to be one or two quarters of sluggish growth even right at the outset but clearly the declines in the financial market are having a devastating effect on consumer confidence and on investor confidence. We have lost faith in corporate America; we've lost faith to some extent in government's ability to keep our economy on track. And so it does seem as if things are falling apart. I'm not convinced that the economy is in another recession or in a double dip recession but it certainly feels like that to a lot of people. The confidence numbers show it and we all feel generally very unsatisfied by the progress our economy has made this year.
Ellen Frank, signs of a double dip recession in your opinion?
Well, things were looking up over the summer. In July and August there were some good signs, especially with consumer spending and auto sales thanks to the zero percent financing deals that were being offered but the one thing that we haven't seen over the past year is any real rebound in capital equipment spending. And that to me is really the critical component of any kind of prolonged or sustainable growth trend. Until we see businesses start to purchase new equipment again we're going to be in a very tenuous, very unstable economy. And there are a lot of things that are suppressing that kind of spending right now.
First of all, there's overcapacity from the boom of the 90's. Secondly, there is a lot of concern about what is going to happen to oil prices in the near and not so near future. I don't think that the possibility of a war is making anybody feel very good right now and of course the financial system is in a very unsettled place right now, which is making it difficult to obtain credit. So all of these things I think are holding back demand. We're too reliant right now on consumer spending and there's a limit to how much consumers can pull us out of a stagnant economy.
William Spriggs, what do you think is affects and is affecting the consumer confidence?
Well, a lot of people got spoiled by the expansion of the 90s and have not been able to see bad news. I think it took a while for people to see that the economy really was turning down. After the supposed recovery began, we still have not seen any of the job growth that you would expect with a recovery. So the two million jobs that were lost when the recession began simply have not reappeared. And people who were used to a churning the labor market, seen people lose jobs, quickly regain them, I think are now settling into the realization that jobs aren't going to come back that quickly.
That is making people a little more gloomy. And then all of the talk of war – the uncertainty is making people even more apprehensive. And then the debt that people have taken on – the whole recovery has been financed by consumers and unlike the U.S. Government, which can go into debt for long periods, individuals cannot. And so I think the real worry would be that with a lack of optimism on the part of consumers from a belief that jobs aren't going to necessarily come back, if we see them try and pull their own house in order as to their debt load, then we'll have some real problems.
Nancy Kimmelman one bright light in this of course are very low interest rates really at a 40-year low. You would think that that would encourage some consumer confidence, would you not?
You would and in fact what we have seen is that auto sales are strong, perked up of course by zero percent financing rates that the auto manufacturers have offered. And the housing market remains strong. Even though we have seen a correction in asset prices in virtually every other sector of the economy we have yet to see housing prices correct in any meaningful sense. So low interest rates are having a boost on the housing and the auto industry, and that really is what's holding our economy together in here.
The other point to remember is that the reason our debt levels are increasing, the reason consumers are taking on more debt is that interest rates are so low. When you have zero percent financing rates for cars, you are effectively giving consumers an incentive to borrow. Their real interest rate is actually negative. You are giving them money to borrow. So it makes sense that they would take on added debt, that they would increase the amount that they owe in a very low interest rate environment like we're in right now.
But, you know, confidence is more tenuous than that. Confidence is a function of not just interest rates, not just the case of economic growth; it's also a function of the President's popularity. It's also a function of our geo-political situation and feeling somewhat alone in our battle, aside from Great Britain, feeling alone in our battle against Saddam Hussein and perhaps against terrorism. And confidence is clearly connected to the financial markets, which are clearly unstable. You know investors and consumers are one in the same so when investors lose confidence, consumers lose confidence, too.
Ellen Frank, that talk of war or as the Fed put it in its wonderfully elliptical phrase, geopolitical risks, how does that play on consumer confidence and investor confidence since wars have been known to stimulate the economy in the past?
Well, wars have stimulated in the economy in the past. Specifically the Vietnam War was great for the U.S. economy. You drafted thousands of young men and relieved pressure on the labor market. Unemployment rates were at historic lows for many years during the Vietnam War. World War II was great for much the same reason. There was massive government spending, deficit financed, government spending financed by borrowing so it didn't take out of consumers' pockets and form higher taxes.
But I don't think the proposed war with Iraq is that kind of war. We're not talking about a massive commitment to ground troops and weapons. We're look at a more limited war. I mean, I think we're looking at a more limited war. There's also a lot of conflict in Washington right now over fiscal policy and how things should be paid for and whether things should be paid for with higher taxes or whether things should be paid for through cuts in other programs. We're hearing very, very mixed messages from the Bush Administration on this issue right now. And the other thing of course is that the Iraq war has the potential and many people are worried that it has the potential to become – in fact Tony Blair used this language — a worldwide conflagration – that it would impact the entire world in a very dangerous way. It also has the potential to raise oil prices significantly, which is not good for the U.S. or any other economy. So I don't see the war — right now I think the potential for war and fear of war is holding back people's willingness to spend and take on long term invest investments.
William Spriggs, interpret for us this increase in the poverty rate, first time in eight years it's gone up, this is a change. What does this reflect?
Well, it's the number for 2001, so it reflects the beginning of recession. I think that's the key. A lot of people fooled themselves into believing because the labor market was generating thousands — millions of jobs a year that we had solved the poverty problem because everybody was getting a job neglecting that when those jobs go away poverty will reappear. It's the tip of the iceberg because this year the share of people holding jobs is lower than last year; the recession has deepened from the labor market perspective. So this year we should actually believe that poverty is at a higher rate than what was reported for last year and that's part of problem here.
People aren't seeing the government respond to this growing problem that they see with their neighbors, with their kids maybe not leaving so quickly from the house so I think that we have to have some sort of response from the government to this increase of poverty so that we gain some confidence that they are on top of it. The last recession we had in the 90s at least in the African-American community poverty rates continued to increase – for everybody – they increased for four years.
So is the suggestion that this is most punishing for those at the lower end of the economic scale?
It's been a little deeper than at the very bottom. Clearly, those at the bottom have suffered. We saw the poverty rates inch up but not leap up. They did so for some people in a strange way. For instance, family poverty rates jumped up quite a bit. African American married couples actually had the rate jump up by a huge amount. So there are surprising groups of people who had their poverty rate go up because of the loss of one earner. And that shows how tenuous it is for those at the bottom.
The other thing that showed up was the increase in inequality that took place in 2001. We had halted the big increase that inequality that had been taking place by having such a big, big expansion that benefited a lot of people at the bottom, and now we see those numbers showing once against that those at the top 20 percent of the population get over half of the income in the United States. And that's an unprecedented number.
Nancy Kimmelman, the question of the Bush tax cut and whether that — has that shown any impact on the economy that you can measure or see one way or the other?
I think the jury is still out on that but, you know, as with all tax cuts it's very difficult to actually find the impact on spending. And this tax cut that we just went through is no exception.
All right. Thank you all three very much.
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