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Tilting at Windmills

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January 10, 2008
By: Kevin Drum

ECONOMIC ROUNDUP....Three pieces of economic news today: First, holiday sales sucked:

An already weak holiday shopping season turned out to be even worse than expected for many of the nation's retailers, who reported Thursday they had disappointing sales results for December. The poor performance raised more concerns about consumer spending, and in turn, the health of the economy.

Adjusted for inflation, December retail sales dropped about 2% compared to last year. Next up, credit card borrowing surged:

The Federal Reserve reported Tuesday that consumer borrowing climbed at an annual rate of 7.4% in November, far higher than the 1% rise in October.

The category that includes credit card debt surged at an annual rate of 11.3%, a six-month high, an indication that shoppers were relying heavily on credit cards to finance purchases since home equity lines of credit became harder to get....The 11.3% rise in credit card debt was the seventh straight month of strong gains in this area and was the biggest jump since a 12.8% rise in May.

So consumers had to max out their credit cards even though they bought less than last year. This is not good, and apparently the Fed agrees:

Ben S. Bernanke, the chairman of the Federal Reserve, sent a strong signal on Thursday that the central bank will lower interest rates again this month as it attempts to stave off a recession.

....He cited high oil prices, plummeting home prices and the struggling stock market as factors that "seem likely to weigh on consumer spending as we move into 2008."

A lackluster employment report in December, which showed the unemployment rate rising by 0.3 percentage points, also appeared to give the chairman pause. He called the report disappointing and noted that the labor market had previously been a source of stability amid a difficult economic situation.

This is really bad news. The chickens are coming home to roost.

Kevin Drum 1:24 PM Permalink | Trackbacks | Comments (56)

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Comments

Not a surprise. There was nobody in the stores just before Christmas, a big change from recent years.

Posted by: dem'08 on January 10, 2008 at 1:26 PM | PERMALINK

Nonsense. Everything's just fine! The market will adjust itself and endless prosperity will be ours once again. Dow 300,000 by this time next year!

Posted by: Conservatroll on January 10, 2008 at 1:28 PM | PERMALINK

Well I guess INKBLOT will be happy that the chickens will be visiting his backyard. I can just hear him -

Feathers all around! On me!

Posted by: optical weenie on January 10, 2008 at 1:28 PM | PERMALINK

But will lowering interest rates affect the credit card debtors or even give them minor relief? Not a chance. The FED is stuck with limited tools and an ossified ideology that forbids "helping" the economy in any way other than helping the banks.

Posted by: John B. on January 10, 2008 at 1:33 PM | PERMALINK

But inflation fears from high oil prices means the Fed can't lower interest rates too much more...

People my age and older, remember "stagflation"?

Posted by: SocraticGadfly on January 10, 2008 at 1:37 PM | PERMALINK

[***Idiocy deleted]

Posted by: mhr on January 10, 2008 at 1:37 PM | PERMALINK

$3/gallon gasoline is the Grinch that stole Christmas this year.

Posted by: David W. on January 10, 2008 at 1:37 PM | PERMALINK

I think the Fed is in the worst pickle of its entire existence. The more they lower rates, the more it pushes oil up, which immediately drains money out of everybody's pocket, which will immediately result in *increased* credit card debt. Jeebus, the whole country is all going to be tapped out all at the same time.

Posted by: Doc at the Radar Station on January 10, 2008 at 1:38 PM | PERMALINK

"If you believe in fairies, clap your hands! C'mon kiddies, Tinkerbell will live if we all just clap our hands!"

-- Peter Pan

We used to have Stagflation but now we've got better deer rifles.

Posted by: thersites on January 10, 2008 at 1:40 PM | PERMALINK

The Democratic presidential primary this year is really starting to look like the Democratic mayoral primary in my beloved Boston: the real general election.

Posted by: Jasper on January 10, 2008 at 1:42 PM | PERMALINK

On the CC debt. I just put $6,000 on Lowes CC, no interest/no payments for 12-months...my thought, why not keep my money in saving and use their money? cleve

Posted by: cleve on January 10, 2008 at 1:43 PM | PERMALINK

mhr, far from feeling gleeful I'm getting worried. I'm the spouse of an artist who has seen her sales take a dive over the past three years (she describes herself as the economic canary in the proverbial coal mine) and last year's sales were terrible as middle-class people just don't have much discretionary money left after paying bills to spend anymore. I've been seeing this economic train-wreck coming down the tracks and I don't think it'll be fun for anyone.

Posted by: David W. on January 10, 2008 at 1:50 PM | PERMALINK

It will be interesting to see just how much Ritalin™ that the Bush administration and the federal reserve can throw at the economy over the next few months to make sure it doesn't cliff dive until 2009.

Posted by: Doc at the Radar Station on January 10, 2008 at 1:51 PM | PERMALINK

The obvious answer is to give even bigger tax breaks to the ultra-wealthy as well as rebates to oil companies. It would help if we eliminated Social Security, too.

Posted by: Al on January 10, 2008 at 1:52 PM | PERMALINK

When writing about the use of credit cards this year, are internet purchases figured into the equation? My family did more of our Christmas shopping online than ever before and, if we are typical in that regard, that would certainly affect the numbers you are using.

Posted by: Michael on January 10, 2008 at 1:52 PM | PERMALINK

we are already in a recession.

Posted by: bob on January 10, 2008 at 1:52 PM | PERMALINK

To a man with only a hammer in his tool box, every problem has to be a nail. So sits Ben Bernanke, with only one tool in this tool-box.

Therefore, rates will fall--inflation and dollar devaluation be damned.

The credit system has locked up and only has been partially restored by anonymous TAF auctions. But credit movement must be restored even better in order to continue the flight of the dodo.

If the credit market isn't restored, the next big event will be the failure of a bond insurer. Then the bottom will fall out of everything.

The "good" news yesterday was that the recssion will last only six months, via Goldman Sachs.

They're just being polite and helpful to the administration. It will be far more severe and longer lasting than that. Picture a good portion of all of that mortgage money generated between 2000-2006, multiplied by 10-25 times leverage in the hedge funds, disappearing from the market.

Very drastic changes coming--lots of broken companies, broken funds, broken units of government and broken people.

Mr Lucky, aka GWB, is indeed fortunate to have the primaries to occupy the media for the next few months.

Posted by: Neal on January 10, 2008 at 2:01 PM | PERMALINK

Maybe at the end of this episode the USA will be consuming less. Vain hope, I know.

Posted by: troglodyte on January 10, 2008 at 2:07 PM | PERMALINK

Bernanke cannot fix the irresponsible lending that took place during the government-abetted housing bubble, so he has no tool to fix this. Unfortunately, he already knows what his attempted solution will do. Japan has tried it already. Refusing to take their medicine for their real estate bubble, they had a stagnant economy for a decade.

When President Dem takes over, s/he needs to make certain that the Fed does a 1981, clearing the way for decent growth rather than letting the Republicans saddle the Democrats with a share of responsibility for the Republicans very, very bad, irresponsible fiscal policy decisions.

By the way, right after Ben spoke, the dollar dropped and oil prices spiked. I'm sure that $3.599 gasoline will whip the economy right into shape.

Posted by: freelunch on January 10, 2008 at 2:13 PM | PERMALINK

Robert Reich has this to say in an oped in the Financial Times recently.

The fact is, middle-class families have exhausted the coping mechanisms they have used for more than three decades to get by on median wages that are barely higher than they were in 1970, adjusted for inflation. Male wages today are in fact lower than they were then; the income of a young man in his 30s is now 12 per cent below that of a man his age three decades ago. Yet for years America’s middle class has lived beyond its pay cheque. Middle-class lifestyles have flourished even though median wages have barely budged. That is ending and Americans are beginning to feel the consequences.

The first coping mechanism was moving more women into paid work. (...) a second coping mechanism. The typical American now works two weeks more each year than he or she did 30 years ago. (...) As the tide of economic necessity continued to rise, we turned to the third coping mechanism. We began to borrow, big time.

Of course all the GDP growth has been captured by capital which means for 1% of the population the economy is booming. The economy is, as George Bush will tell you, doing well. Similar patterns occur in countries that have adopted the same policies including Japan.

The decline of the American consumer should also drive foreign exporters to look for other markets and therefore reduce their dependency on the dollar. Unfortunately no other economy can take up the slack. Chinese wages are even more dramatically depressed.

Consumption by Chinese residents contributed only about 36% to GDP (in the US and Europe it is near 70%) in the first three quarters last year, according to the report. That compares with around 60% from 1978 to 2002, when China just started its economic reforms and opening up to the rest of the world. The figure slipped to 50% in 2006. Asia Times 8 January 2008

Posted by: bellumregio on January 10, 2008 at 2:17 PM | PERMALINK

Very drastic changes coming--lots of broken companies, broken funds, broken units of government and broken people. Posted by: Neal on January 10, 2008 at 2:01 PM

Just a slow-motion tumble onto the shoulders of the next elected president....right on time, where the gleeful conservative media in all its forms gets to come out and cry and scream and hollar how bad that next (Democrat) president is handling his or her job when this country hits bottom.

If I were a presidential candidate, one of my staff members would have the full time job of clipping Bush-era statistics for future ammunition against the ramp-up of bald-face conservative lies and ass-covering that is also coming down the tracks starting in 375 days or so.

Those chickens aren't coming home to roost, the GOP hate-machine will find incredible ways to relabel them as Democrat chickens.

Posted by: Zit on January 10, 2008 at 2:17 PM | PERMALINK

Doc,
I don't think GWB and his administration give a rat's a$$ about the economy. He'll just slither out the back door like he's done all of his life when he's made a business bumble.

So there will be no Ritalin and lowering the interest rates and cutting taxes on the rich isn't gonna fix this one.

Time to hunker down folks.

Posted by: optical weenie on January 10, 2008 at 2:18 PM | PERMALINK

Michael -- Those figures are for credit card DEBT, not just use. My guess would be they're talking about unpaid obligations, not overall balances.

Posted by: farmgirl on January 10, 2008 at 2:24 PM | PERMALINK

Free Lunch: Agreed; we need a Paul Volcker to deliver the medicine, unpleaseant as it may be.

Al: Agreed, too; let's eliminate your Social Security as a starter. There, that wasn't so hard!

Posted by: SocraticGadfly on January 10, 2008 at 2:27 PM | PERMALINK

For a short period the Republicans and the Democrats will offer tax cuts to the stagnant Middle Class to relieve the financial strain. But it can only be temporary and will be relatively shallow. The US is getting close to tapping out the international savings pool, so any tax cuts will necessitate cuts in spending, a favorite formula, further reducing those things that improve the lives of Americans from infrastructure to schools and funding of scientific research. This in turn will be used to privatize all these functions providing the haves with even more of a share of American wealth.

This is why Emmanuel Todd, the man who read the demographic tea leaves and predicted the fall of the Soviet order back in the 1970's, says the US will have the same fate but by the opposite ideology.

Posted by: bellumregio on January 10, 2008 at 2:36 PM | PERMALINK

Cutting taxes for the wealthy won't work. We need another Clinton '93, increasing taxes on the wealthy and showing Wall Street that Washington had become serious about cutting the unsustainable deficits. A modest tax break for lower tax brackets.

And the next President will have to rollback military spending. The only way to do that is to bring home the troops from Iraq. Whether we leave the equipment behind is another question; whether all of the armored vehicles that defended Europe rust away in Iraq or Texas isn't that important to me.

Posted by: OwnedByTwoCats on January 10, 2008 at 2:43 PM | PERMALINK

BellumRegio: Indeed, empires end. I recommend Paul Kennedy's "The Rise and Fall of the Great Powers."

Posted by: SocraticGadfly on January 10, 2008 at 2:58 PM | PERMALINK

TwoCats,

We need to bring the equipment home to rust. Leaving it in Iraq cannot possibly help stabilize the region.

Posted by: freelunch on January 10, 2008 at 3:02 PM | PERMALINK

I guess all them multi-billionaires with those big tax cuts have not been spending those tax cuts.

This is the problem with tax cuts for billionaires. They don't buy stuff. They already own whatever they need.

Posted by: POed Lib on January 10, 2008 at 3:03 PM | PERMALINK

We'll know in about 6 months whether we're currently in a recession -- after all the data are in. Until then, please join the president in refraining from using the R word.

You is scaring the children.

Posted by: Econobuzz on January 10, 2008 at 3:05 PM | PERMALINK

Econobuzz, could you share your stash with us, please.

Posted by: freelunch on January 10, 2008 at 3:10 PM | PERMALINK

All this talk about the economy, holiday spending and the housing market if true which it is and everyone knows it, then that means our commander and cheat is a LIAR, do you all remember not long ago Bush said the economy was strong and the housing market is on the rebound ? Shit folks wake up and have your eyes open before you go to the polls and make another mistake by voting for another Republican.

Posted by: Al on January 10, 2008 at 3:13 PM | PERMALINK

They seem not to be spending those tax cuts; they are piling up money like Gilded Age robber barons. The graph of wealth accumulation by the top 1% looks like the global warming hockey stick. The argument used to be that the tax cuts would be reinvested and the domestic economy would grow, but this has not been the case. Perhaps it was a better argument in the past but not in today’s globalized market. Why build a factory in the USA when you can build it in China where the labor is really cheap, the unions weak and the regulation non-existent? In any event Middle Class wages have been flat for more that 30 years.

Posted by: bellumregio on January 10, 2008 at 3:16 PM | PERMALINK

The thing that would fix the economy most obviously is to increase taxes on the wealthy. Our situation in the 50s and 60s was pretty decent nation-wide and taxes on the wealthy were much higher. To return to that level of prosperity, we need to increase the taxes on wealthy. I suggest 50-60%.

Posted by: POed Lib on January 10, 2008 at 3:20 PM | PERMALINK

Other countries, like Great Britain, that have adopted these policies at least have a vocabulary of social belonging and a decent appreciation of risk-sharing. In the US the polemic machine created by the movement conservatives has impoverished American political discourse and reduced the number of normative options that can help soften, if not mitigate, the nasty side of neoliberialism. This is just what they set out to do and it just what the complicit Democrats and the sleeping progressives let them do.

Posted by: bellumregio on January 10, 2008 at 3:29 PM | PERMALINK

"The chickens are coming home to roost."

Excellent! Then there will be "a chicken in every pot." Will there also be "a car in every garage"? Followed by a Wall Street crash?

Posted by: josef on January 10, 2008 at 3:36 PM | PERMALINK

We have hundreds of billions for wars and bank bailouts.We must not increase entitlement spending.I personally love cake.

Posted by: al on January 10, 2008 at 3:59 PM | PERMALINK

Peak Oil will make a hash out of all these fine liberal and conservative "fixes." We are at the end of the Easy Oil Age.

Posted by: Speed on January 10, 2008 at 4:01 PM | PERMALINK

How much do you gift cards figure into the retail sales drop do you think? Not sure if it would be significant, but it might be...oh, and the fed is dropping rates again.

Posted by: drosz on January 10, 2008 at 4:01 PM | PERMALINK

This is really bad news. The chickens are coming home to roost.

So, the stock market climbs 118 points.

Posted by: pol on January 10, 2008 at 4:52 PM | PERMALINK

So, the stock market climbs 118 points.

And the dollar drops and oil goes up. Hence the squeeze on the consumer dollar.

Posted by: David W. on January 10, 2008 at 4:56 PM | PERMALINK

I once heard a caller on the Rush Limbaugh show complaining about the high cost of gasoline. "Gasoline!", Rush shouted, "try Jet fuel! I'm paying 5 bucks a galloon for jet fuel!"

True story, swear to god.

Posted by: sceptic on January 10, 2008 at 5:11 PM | PERMALINK

My economic background consists of two undergraduate semesters of macro-economic theory. So would someone more sophisticated than I explain how a nation can sustain healthy growth solely on consumer spending?

We don't seem to manufacture much of anything any more. We import more than we export. The consumer spending binge of the past decade was financed in large part with home equity loans, based on the alleged price that presumed future buyers would be willing to pay. Or not.

Has the U.S. economy turned into a large-scale Ponzi schema or am I missing something?

Posted by: Mandy Cat on January 10, 2008 at 5:35 PM | PERMALINK

Seems to me one explanation for the lower holiday spending combined with higher credit-card borrowing is that an awful lot of people used their credit cards to buy gift cards as holiday gifts, and the amount of those gift cards doesn't show up as "spending" until they are used. So although it may be true that "consumers had to max out their credit cards," it may NOT be true that "they bought less than last year" -- because the "buying" they did has not occurred yet and won't occur until all of those gift cards are used up.

Posted by: Bob on January 10, 2008 at 5:39 PM | PERMALINK

Bush Baby is looseing his FBI wiretaps because of unpaid phone bills $6000 per phone company, he gets caught in another lie, typical Republican thats all they know how to do is lie about this and lie about that. LMFAO YEH GO AHEAD AND VOTE FOR ANOTHER REPUBLICAN, YOU FOOLS.

Posted by: Al on January 10, 2008 at 6:00 PM | PERMALINK

The big push of the Democratic Party in the '60s and '70s was Civil Rights.

Starting with LBJ (ahead of his time), Bobby Kennedy (killed young), Carter (not politically astute) and then Clinton (fought by Congressional Repubs) the Democrats have moved steadily into a 'discussion' about economics.

Who is the natural successor to that?

Obama offers vague talk. Hillary offers Repub-Lite fiscal conservatism. Edwards offers Progressive ideas.

Will any Republican or Obama or Hillary offer us a way out of this train wreck we see coming?

Posted by: MarkH on January 10, 2008 at 6:45 PM | PERMALINK

You folks may top Krugman's record. He's only predicted 30 of the last 4 recessions. By my count, this group has predicted about 12 the last 3 years.

Posted by: PaulKrugmanesque on January 10, 2008 at 7:29 PM | PERMALINK

Has the U.S. economy turned into a large-scale Ponzi schema or am I missing something?

Nope, that's pretty much it. Exhibit A: the housing market. If you got in early and got out six months ago, you're sitting pretty. Everyone else is in for some serious pain.

Posted by: Mnemosyne on January 10, 2008 at 8:40 PM | PERMALINK

The greed that controls Wall Street does not want anyone to think about recession because then the consumer will close their wallet.

They will lie through their teeth on their death bed to convince everyone that a recession can be avoided.

Do not be fooled, we already are in recession.

Greed is a terminal disease.

And yes, my wallet is closed for business.

Posted by: MEG on January 10, 2008 at 9:41 PM | PERMALINK

This is really bad news.

True.

Continuing investment in domestic alternative energy supplies {2005 and 2008 energy bills}, in oil from the Gulf of Mexico, and oil production in Canada ought to help some. First by increasing other employment alternatives, then by reducing fuel costs. But not in a big hurry.

Posted by: MatthewRmarler on January 10, 2008 at 11:42 PM | PERMALINK

Mnemosyne: If you got in early and got out six months ago, you're sitting pretty. Everyone else is in for some serious pain.

That's an exaggeration. Most people who have owned their houses at least 3 years are still ahead, and especially if they owned their houses at least 5 years. That's almost all home owners in the U.S. Here in San Diego County, large areas experienced house price increases of about 60% over a few years, followed by 25% in the last 2 years. Nationwide, the same story is true, but with a less dramatic swing.

Posted by: MatthewRmarler on January 10, 2008 at 11:48 PM | PERMALINK

Let them eat cake!

Posted by: Captain on January 11, 2008 at 12:25 AM | PERMALINK

I work in retail in Orange County, CA. Bicycles to be exact.

We saw a 15% decline pre-Christmas and so far a 40% decline post Christmas over last year. Our business is particularly recession-prone because bicycles are considered "toys" in our society.

We are in a recession, folks.

Posted by: Richard on January 11, 2008 at 11:57 AM | PERMALINK

Good article on China's subsidy of the American economy

...Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus—$1.4 trillion and counting, going up by about $1 billion per day—that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China. Like so many imbalances in economics, this one can’t go on indefinitely, and therefore won’t...

Posted by: Mike on January 11, 2008 at 4:31 PM | PERMALINK

So, the stock market climbs 118 points.

That didn't last long...

Posted by: Stephen on January 11, 2008 at 4:57 PM | PERMALINK
…That's an exaggeration….MatthewRmarler at 11:48 PM
When bubbles pop

The bulk of the nation's economists and economic reporters somehow managed to miss the $8 trillion housing bubble...The latest Case-Shiller index shows that house prices are now falling at an 11.3 percent annual rate, which would destroy over $2.2 trillion in housing wealth in the course of a year....

A couple of trillion here, a couple of trillion there, and pretty some no one would be dumb enough to call it 'exaggerated.'

Posted by: Mike on January 12, 2008 at 7:07 PM | PERMALINK




 

 

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