Economists are optimistic. They're also wrong.
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Robert Reich Guest blogger
Economic forecasters exist to make astrologers look good. But the recent jubilance is enough to make even weather forecasters blush. 鈥淛ust look at the bull market! Look at home prices! Look at consumer confidence!鈥�
Please.
I can understand the jubilation in the narrow sense that we鈥檝e been down so long everything looks up. Plus, professional economists tend to cheerlead because they believe that if consumers and businesses think the future will be great, they鈥檒l buy and invest more 鈥� leading to a self-fulfilling prophesy.
But prophesies can鈥檛 be self-fulfilling if they鈥檙e based on wishful thinking.
The reality is we鈥檙e still in the doldrums, and the most recent data gives cause for serious worry.
Almost all the forward movement in the economy is now coming from consumers 鈥斅� whose spending is 70 percent of economic activity. But wages are still going nowhere, which means consumer spending will slow because consumers just don鈥檛 have the money to spend.聽
On Thursday the Commerce Department that consumer spending rose 3.4 percent in the first quarter of this year. But the personal savings rate dropped to 2.3 percent 鈥� from 5.3 percent in the last quarter of 2012. That鈥檚 the lowest level of savings since before the Great Recession. You don鈥檛 have to be an economic forecaster, or an astrologer, to see this can鈥檛 go on.
Yes, home prices are rising. The problem is, they鈥檙e beginning to rise above their long-run historical average. (Before the housing crash they were were way, way above the long-run average.) So watch your wallets. We鈥檝e been here before: The Fed is keeping interest rates artificially low, allowing consumers to get low home-equity loans and to borrow against the rising values of their homes. Needless to say, this trend, too, is unsustainable.
What about the stock market? It鈥檚 time we stopped assuming that a rising stock market leads to widespread prosperity. Over 90 percent of the value of the stock market 鈥� including 401(k)s and IRAs 鈥� is held by the wealthiest 10 percent of the population.
Moreover, the main reason stock prices have risen is corporate profits have soared. But that鈥檚 largely because corporations have slashed their payrolls and keep them low. Which brings us full circle, back to the fundamental fact that wages that are going nowhere for most people.
Not even fat corporate profits are sustainable if American consumers don鈥檛 have enough money in their pockets. Exports can鈥檛 make up for the shortfall, given the rotten shape Europe is in and the slowdown in Asia.
So don鈥檛 expect those profits to continue. In fact, the new Commerce Department report shows that corporate profits shrank in the first quarter, reversing some of the gains in the second half of 2012.
And, by the way, the full effect of the cuts in government spending hasn鈥檛 even been felt yet. The sequester is going to be a large fiscal drag starting next month. 聽
Look, I don鈥檛 want to rain on the parade. But any self-respecting weather forecaster would warn you to zipper up and take an umbrella. Don鈥檛 be swayed by all the sunny talk. There are too many storm clouds ahead.聽
