Surprising Economic News

Surprising Economic News

From March 2, 2009 Reuters:

WASHINGTON (Reuters) - U.S. consumer spending rebounded in January, snapping six months of declines, and incomes rose unexpectedly, boosted by salary increases for government employees, a government report showed on Monday.

But the gains in January are likely to be temporary as wages and salaries continue to fall amid a deepening recession.

The Commerce Department said spending rose 0.6 percent, the largest increase since May, after falling an unrevised 1 percent in December, and beating economists' expectations for a 0.4 percent advance.

...

The department attributed to rise in incomes to pay raises for federal civilian and military employees, as well as cost-of-living adjustments to several government transfer payments programs. It said excluding these factors, incomes increased by 0.2 percent in January.

Any increase in incomes at all is somewhat surprising and good news, even if much of that was because of government pay raises. But the more encouraging news (from a responsibility standpoint, if not from a stimulus point of view):

"There was a big increase in the savings rate to 5 percent. It is good that people save but it is not good that everybody saves at the same time. That makes the current downturn more severe and long lasting."

Savings jumped to an annual rate of $545.5 billion, the highest level since monthly records began in 1959. The saving rate surged to 5 percent in January, the biggest advance since March 1995, as households uncertain about the economy prefer to conserve their cash.

From a responsibility standpoint, that is excellent news. It is the equivalent of the guy who wakes up hungover at 11:00 AM Saturday morning, in a strange apartment, trying to figure out why all he is wearing is a leopard skin loincloth (and he doesn't even own one), and swears off drinking. It may not last, but it's an improvement over previous misbehavior.

From the standpoint of stimulus, this is not so good. It means that whatever money Uncle Obama manages to drip into people's paychecks through reduce withholding is likely to end up squirreled away in savings. Good for individuals to have a rainy day fund; bad for the rest of the economy, which needs some spending.

On that same note, here's something quite disturbing. I found this link at a piece by Todd Zywicki at Volokh Conspiracy, and it should concern you a lot. It's the St. Louis Federal Reserve Bank's Adjusted Monetary Base graph. Take a look at what has been happening to the money supply in the last couple of years. You can't blame this on Obama; some of this started during the end of George "We had to destroy capitalism to save it" Bush, and the Federal Reserve Banks are supposed to be independent of whatever fool is running the government at the moment.

Zywicki points out the reason that this isn't showing up price inflation yet:

Presumably because the "velocity" of money has remained low--people and banks are hoarding money, rather than spending, borrowing, and lending it. Assuming velocity rises again, however, we may be looking at an inflationary spiral like we've never seen before in this country.

Which fits with the record savings rate, slowing down the velocity of money.

I don't know what's going on in the other districts, but I rather suspect something similar. I smell big inflation coming. That will (for a while) revive the economy, solve some of the housing crisis, and make some people think that they are better off, because there are more dollars in their pocket. But inflation of the money supply--especially this vigorous--has a bad habit of causing gross distortions in interest rates, in the economy, and eventually, you get the legacy of the Vietnam War during the Carter years: stagflation.