Stimulus: A Second Round?

(MoneyWatch)  Most of the talk of green shoots in the U.S. economy is among people in the impatient, forward-looking financial markets. But in the real world, the employment situation is still pretty grim, and consumers are keeping a firm grip on their wallets. The Obama team took to the political talk shows this morning (Sunday June 28) with a recovery pep talk, and downplayed the possibility of a second economic stimulus later this year. Or could it be they're making plans for another jolt, and starting the dialogue quietly?

This week's news, on personal income, savings and the newly unemployed, reminded us that the economic picture is quite weak, and while things are not getting worse, they're not improving much either.

Real personal income rose 1.6 percent in May, but mostly due to a stimulus measure aimed at senior citizens. And because Americans are all of a sudden saving again -- at 6.9 percent for the month, up from zero in 2008, personal spending was up just 0.2 percent, adjusted for price changes, reversing a 0.1 percent decline in April.

In this graph of those three measures, note how the spending line (in red) has dropped in this recession, versus just flattening out in the 1990 version, and not even missing a beat in the 2000 downturn. (Data in the graph are nominal amounts, not inflation adjusted -- click on the graph to see a larger version.) The climbing savings rate is in green.


New unemployment claims jumped to 627,000 for the week of June 20 -- the highest in several weeks, and still at a very high level. But this is an indicator that frequently reverses course, so one week is not all that meaningful.

In order to provide some reassurance, I guess, on these and other uninspiring mid-course readings, the White House economic team went on the Sunday political talk shows. I didn't hear the question, but their answer was that it's premature to starting talking now about another boost:

"When the stimulus package passed, the president said that it was going to take some time to filter through the system. One of the hopeful signs is that far fewer jobs were lost," said White House senior adviser David Axelrod, on CNN's "State of the Union"... "Hopefully that's a sign that this is turning -- it feels as if we are moving and the stimulus package is not nearly done -- it's at its beginnings."

Beginnings indeed. Recovery.gov reminds us that the total of the stimulus plan is $787 billion, and says that the investments planned under the Recovery Act stand today at $152 billion in "available" funds and $53 billion that have actually been spent. The Department of Health and Human Services and the Social Security Administration have done most of the investing -- $34 billion so far.

Is it taking a long time to get the Recovery Act funds to work? It seems an eternity that we first heard about these grand plans, but really it's just been a few months.

Observers from all points of the compass are telling us to be patient, and how important it is to leave the stimulus measures in place. In The Economist last week, Christina Romer, chairwoman of the Council of Economic Advisers, presented the object lesson of 1937, when monetary policy was prematurely tightened and the economy went back into recession:

The 1937 episode provides a cautionary tale. The urge to declare victory and get back to normal policy after an economic crisis is strong. That urge needs to be resisted until the economy is again approaching full employment.

She also raised the possibility of additional stimulus being needed in 2011.

And here is John Authers of the Financial Times, summing up the OECD's message last week:

Anyone reading a year ago what the OECD had to say [in its recent forecast] would have been horrified. ...

Yet anyone reading it during the worst months of the crisis late last year would have been relieved...

So there is the consensus [among the U.S., European and Swiss central banks]: disaster averted, no strong recovery as the developed world relies on China for its growth, and no quick end to extreme policy measures.