Consumer income (national aggregate figures) remains stagnant, which means the rise in consumer spending (PCE) came from savings. Indeed, the savings rate declined slightly. Calculated Risk explains. The administration, some of the macro-economists, and the media spin this statistic--the rise in PCE--as indicating "full recovery" is underway. But that is a greatly optimistic and misleading evaluation.
It is unlikely that workers' incomes are going to rise much over the next several years, or even later. The increases in productivity of US manufacturers demonstrates that they can keep their hiring low and slow, which increases labor competition and lowers pay increases. As the increases in productivity are coming from machinery, rather than (as far as I can tell) increases in education, skills, or experience of the laborers themselves, workers will have weak bargaining positions in increasing their wages. Meanwhile, the aggregate economy continues its shift of resources from the manufacturing sector to the service and governmental sectors, where productivity increases are difficult to achieve, if not impossible or self-canceling (increasing inefficiencies in government cancel weak productivity increases in private medical sector, for example).
The decline in savings is unlikely to continue for long, because workers incomes aren't rising, which will weaken their confidence in their future earnings, thereby exerting caution in spending and increasing motivation to save.
If increases in consumer consumption don't come out of savings, can't come out of incomes that aren't rising, and can't come out of future income, then from where does the money for consumption increases come? From credit? Okay, some spending based on credit is important for consumers, as for producers, because consumers need to invest in themselves, their occupations, and their children; but without long-term rise in income, use of credit is severely constrained. If the government pushes mechanisms to increase consumer lending, we could easily slip into a credit bubble. And wasn't it a credit bubble--in housing--that drove the economy over the cliff in 2007? Do we want to risk that again?
Other challenges to consumer income and household wealth loom. ObamaCare (if not repealed) will draw huge taxes out of the economy, as will increases in taxation to shore up Medicare and Social Security. And Obama remains psychotically committed to cap and trade, which would bring huge tax increases. These tax increases will make big gashes in workers' income. If all the Obama debt and the future debt of entitlements can only be paid with a huge VAT, on top of all other personal taxes, then households will have no money to increase consumption, invest in themselves, or to increase savings to make up for the threats to their livelihoods caused by all these new taxes, and for retirement.
Finally, the unemployment and underemployment rates remain very high, dampening all growth. Unless Obama's full court press toward the goal of European welfare socialism is stopped, America will face a generation or more of weak growth, or even economic stagnancy, with high unemployment and increasing obstacles to economic and social mobility as the lower and middle classes are trapped in welfare dependency. This situation will only be resolved in state fiscal crisis, as Europe now proves, compelling pull back from the mire of socialism.
Revised.
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