Consumer Spending Increases

Despite the expiration of the payroll tax cut and the increase on Social Security taxes that began on the start of the new year, The New York Times reports that consumer spending rose by about 0.2% in March. According to the federal government, the increase that took place between January and March marks the fastest increase in consumer spending for over two years. This increase is partially due to the fact that March was unusually cold, leading American’s to spend more for heating. Thus it is important to note that although an increase in consumer spending is typically good, an increase which is the result of spending more on utilities does not necessarily indicate higher consumer confidence. Spending on other things, such as clothes, cars, household goods, and furniture would be more indicate of this. However, there is some room for optimism. The Commerce Department claims that the economy grew by 2.5% during the January-March quarter. This was 6 times higher than the rate recorded for the fourth quarter. Although this grow rate would be considered optimal in an economy with low unemployment, during a struggling economy this growth rate is not high enough to diminish unemployment.

Although taxes have increased, many believe this uptick in consumer spending could continue since American’s have reduced their personal debt, their home values have likely risen, and their stocks enjoyed some success further adding to their household wealth.

Since the recession officially ended in June 2009, growth has been weaker than usual after a severe downturn. The economy expanded just 2.4 percent in 2010, 1.8 percent in 2011 and 2.2 percent in 2012.

Consumer Sentiment, Job Creation Could Suffer if Congress Fails to Reach a Deal

According to a White House report cited in the WashingtonPost, if Congress fails to reach a deal that would renew for the Bush-era tax cuts for middle class Americans, the economy may suffer. Among other consequences, consumer spending could plunge by $200 billion dollars, since middle-class Americans may become reluctant to spend if they are forced to pay $2,200 more in taxes. Consumer sentiment could also take a hit. Although 2007 marked the highest level in consumer sentiment, it declined rapidly in the summer of 2011 during the negotiations over the debt ceiling. Consumer sentiment has recovered since then and currently, it stands at its highest level in over 5 years. However, the Council of Economic Advisers warns that the fear of the “fiscal cliff” could drive down consumer sentiment and consumer spending. The Congressional Budget Office (CBO) also seems to concur with some of the findings of the Council of Economic Advisers, mainly that an extension of middle-class tax cuts could provide a much-needed boost to the economy. The CBO estimates that such an extension would result in a 1.3% increase in GDP and could help add up to 1.6 million jobs. Currently, it appears that negotiations are at a standstill. Although in recent days some top Republicans said they were willing to break Norquist's anti-tax pledge, Republicans and Democrats have not reached a deal to avoid the major spending cuts and tax increases that are set to take effect in 2013.

U.S. Employers Did Not Add Jobs in August; Economists Blame Low Consumer Confidence, Political Impasse

A new report from the U.S. Bureau of Labor Statistics (BLS) indicated that job growth that began in 2010 has ended, bolstering potential claims that more needs to be done by the government to spur job creation. August marked the first time in the past eleven months that nonfarm payroll employment did not increase. Unemployment did not improve either, remaining at 9.1 percent.

According to the New York Times, "the report added to the pressure on the administration, on Republicans who have resisted any new stimulus spending, and on the Federal Reserve, which has been divided over the wisdom of using its limited arsenal of tools to get the economy moving again." Next week, President Obama will deliver the Administration's proposal to increase employment, and Secretary of Labor Hilda L. Solis claimed the President would appeal to the population directly if Congress was unreceptive to his plans. Republicans, however, were quick to blame President Obama's economic policy as the cause of the negative news, even dubbing him "President Zero." Economists had anticipated that 65,000 jobs would be added in August, less than the 85,000 jobs that were added as recently as July. But the report showed the situation was worse than expected. Economists took aim at low consumer demand and political inefficiency, suggesting that "both sluggish demand for goods and services and the heightened uncertainty over the economy’s direction...[led to] the slow pace of job creation," and "saying that political deadlock was creating economic paralysis."

Next up is the question of whether extended unemployment benefits and the payroll tax cut should be renewed for the upcoming year.

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