The American Spectator : The Spectacle Blog : It's Official: The Economy Is Shrinking

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The Spectacle Blog

It's Official: The Economy Is Shrinking

By Philip Klein on 10.30.08 @ 9:22AM

U.S. gross domestic product shrank by 0.3 percent in the third quarter, the Commerce Department announced this morning, the first time it contracted since the quarter that included the Sept. 11 attacks seven years ago. It was a lower than expected decline, but I found this particularly troubling, from the Reuters account:

Consumer spending, which fuels two-thirds of U.S. economic growth, fell at a 3.1 percent rate in the third quarter -- the first cut in quarterly spending since the closing quarter of 1991 and the biggest since the second quarter of 1980. Spending on nondurable goods -- items like food and paper products -- dropped at the sharpest rate since late 1950.

The economic boom that we enjoyed for most of the Bush years was fueled in large part by the housing market, both because those who saw their houses rise in value felt richer and were more willing to spend money and because low interest rates allowed many Americans to refinance their mortgages and spend the money they saved paying off their mortgages. Now the reverse is taking place, and I think we're in the early stages of the economic decline, with the rest of the economy not yet having absorbed all of the tumult on Wall Street. At this point, we're still a long way to go from a depression, during which you're looking at double digit contraction of the GDP.

As for the presidential race, I noted at the beginning of the month that we should all beware of the GDP bomb set to go off less than a week before the election. That is why, for all my criticism of McCain in the past few months, I'm willing to acknowledge that the campaign was largely taken over by events that were beyond his control. There's not much precedent for the incumbent party winning a third straight presidential term in the early stages of an economic contraction.

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M. Tobias| 10.30.08 @ 10:34AM

I agree that one of the reasons for the decline is that the reduction in housing prices and the lack of readily available credit has curtailed some spending. But, the bulk of the consumer spending decline comes for two major reasons.

The first is the rise in the cost of everyday consumables. The skyrocketing fuel prices of the last three months and the resulting increase in the prices of other consumables caused consumers to reassess their spending and divert funds from one consumable to another. It also caused them to divert funds, previously used for the purchase of consumables, into increasing their store of liquid capital.

The second major factor in deceased consumer spending is fear. The media and the politicians have been hammering the public with the message of a major economic collapse of the worldwide economy. When there is a chorus of voices screaming "here comes another Great Depression", then people stop spending and go to the mattresses.

When John McCain assured the American People the economy was basically sound, he did the right thing. The American economy is basically sound and to tell people otherwise is to invite bank runs and other consumer/investor actions that would worsen the economy, virtually overnight, and could send it into that " Second Great Depression" that fearmongers warn of. When politicians use fear of economic downturn to further their own short term gains, they do a massive disservice to their constituents.

Further economic downturn? You betcha. Why? It is a readjustment. The economy is like the ocean, It is a series of waves. Usually the waves are small. So the economy goes up a little, then it goes down a little. But, due largely to the interference of the US government in the housing credit market and the changes in accounting practices that it mandated, we had a huge wave of economic growth, Now, we are sliding down into the trough. Where is the bottom? That is as yet unknown. But as businesses downsize to meet declining incomes, there will be lay-offs that will further reduce disposable income and place a greater burden on the public. So it will continue to decline for awhile. Then, it will start back up. The only question is how long will it take? We just have to wait and see. But, it will come back.

Web Smith| 10.30.08 @ 12:17PM

Too much of consumers' money is going to pay interest. Government legislation, the Fed, and the banks have stripped consumers of their wealth. The economy will not recover until consumers do. Lowering the interest rate and throwing money at banks and other corporations is not going to fix the problem. It is only going to make matter worse when the resulting inflation sets in. Banks are going to have to take their lumps along with everyone else. To reduce the severity, banks need to lower interest rates on credit cards, mortgages, personal loans, and lines of credit. Congress also needs to stop fooling around with things that stimulate the economy like tax credits for renewables and they need to stop bringing cheap foreign labor into the country.

http://ewebsmith.com/Finance/hiddendemon.html