By Jeff Harding
Here’s the latest data on the economy:
Personal consumption [consumer spending] in March fell at a seasonally adjusted rate of 0.2% compared to the month before, the Commerce Department said Thursday. It was the fourth decline in six months. Spending increased a revised 0.4% in February; originally, spending was seen up 0.2%.
Personal income in March fell 0.3% compared to the month before. It was the fifth drop in six months amid labor market deterioration. Income fell an unrevised 0.2% in February. Disposable personal income — income after taxes — was unchanged in March a second month in a row. The 0.3 percent gain in wages and salaries, which account for about 70 percent of total employment costs, was the smallest since the government began tracking them in 1982. For some economists, the deceleration in employment costs raises the risk of deflation.
Personal saving as a percentage of disposable personal income was 4.2% in March, the Commerce Department said. It was 4.0% in February. The saving rate took off about a year ago, as Americans pocketed economic stimulus checks doled out by the Bush administration. People have since been socking away money at rates above those in the years before the recession, worried as layoffs grew and their wealth eroded.
For the first time in more than 50 years, the prices U.S. consumers pay for goods and services were lower on average than they were one year ago, according to March data by the Labor Department. The consumer price index slid 0.1% in March from February. Prices fell 0.4% compared with one year ago, the first time the annual rate has declined since August 1955.
The total number of unemployed drawing jobless benefits hit its 13th-straight record high and now stands at almost 6.3 million, an indication that even if the pace of job cuts does slow, there’s little evidence that new ones are being created.
The U.S. has lost over 5 million jobs since the recession started in late 2007, with over 2 million of those losses occurring in the first three months of 2008 alone, pushing the unemployment rate to a 25-year high of 8.5%.
Also Chrysler filed for Chapter 11 bankruptcy today. GM may not be far behind.
Pretty heavy stuff, but … it’s basically good news because it shows that the bad investments made during the boom times are being liquidated, as they should be. This is what the economy always does in these 
situations—liquidate the bad and return to normal. As I’ve said many times, it’s not a pretty sight, but it’s necessary for recovery. Government attempts to interfere with this process will only delay recovery and cause more pain.
As you may have noticed, some of these data have achieved new historical levels. I point this out to note that this business cycle bust is far larger than most economists had ever anticipated. Starting with the largest credit bubble in history, one would expect a pretty severe downturn. Few economists see these data as being good and necessary.
For example, an increasing savings rate is seen as being bad because people aren’t spending. Not true. First, consumers will not reach former spending levels for many, many years. The housing equity credit card is way overdrawn (home equity has declined to WWII levels). While recovery will eventually occur when home prices stop falling, don’t look for home price to rise to former levels. Second, an aging demographic picture means people will save for retirement since they have lost money in housing and the stock market, they are apprehensive about their company pension plan, and they don’t trust the government to continue to fund Social Security. Third, savings will create new capital to replace the $3.4 trillion in assets wiped out during the crash. This is where the capital for new growth will come from.
Things just aren’t going to go back to their former jolly ways. Things have changed. People are going to save and look to themselves as the means to financial security. Savings are good for them and good for the economy.
Things will get worse. Take heart and spread the safety net. The economy is repairing itself.
Jeff,
Wonder if you can tackle this: in years past, the U.S. economy was much more resilient. Minimum wage was still very low, unemployment benefits limited, and welfare meager. Today, minimum wages in California prevent hiring low-end employees, particularly in the restaurant/fast-food arena, but also in places like car washes, even landscaping. Unemployment benefits seem to continue for a much longer period than in the past, and welfare can continue, well, pretty much forever. How will all that shake out as this recession lingers?
Jim
If you are asking if government intervention such as minimum wage laws and certain welfare programs can extend a recession rather than cure it, the answer is yes. There is only one wage rate and that is what consumers determine it to be by their choice to buy a product at a market price. If you keep the minimum wage above the market wage, all it does is to increase prices for the consumer and reduce employment. The question is: what are the market prices? The old argument against minimum wage is, why not increase wages to $20 an hour? The point is that the government cannot mandate that wage because prices of the consumer product produced at $20 p/hr would be higher than what people are willing to pay for the product and the company paying such a wage would go broke (McDonalds, for example).
Welfare? Yes, it discourages employment and the Clinton era cutbacks on welfare resulted in immediate employment gains from former welfare recipients.
A separate issue is unemployment insurance. Hayek thought it was OK; Mises thought not. Economically, it inhibit recovery as workers delay seeking jobs at lower wage rates. During deflation, this is OK because prices are going down as well as wages. The political answer is more difficult: do you spread a safety net to stop social upheaval? I think I agree with Hayek on this more practical approach in today’s political setting. But it’s a much more complicated issue than this forum would allow.
Good question.