Today the Commerce Department produced more evidence of the worsening recession in its quarterly report on the nation’s gross domestic product (GDP) — a measure of all goods and services produced in the economy. This important indicator shrank by 0.3% in the third quarter of 2008, pulled down by consumer belt-tightening in the face of job losses, plummeting home prices, and overhanging personal debt. As EPI economist L. Josh Bivens noted in an analysis soon after the report’s release, the news bodes ill for the future.
“Today’s contraction was led by a sharp fall in consumption spending, which fell by 3.1%, its first outright decline since 1991. Besides the fall in consumer spending, perhaps the next most worrisome aspect of today’s report was further contraction in business investment in equipment and software, which contracted for the third straight quarter, falling 5.5%. Residential investment fell for the 11th straight quarter and at a faster rate than the previous quarter (19% versus 13%),” he wrote.
On a conference call with journalists, Bivens highlighted a couple of bright points — increases in net exports and defense spending both made positive contributions to the GDP — but he also emphasized that state and local spending were under great strain, barely rising 1% in the quarter, and will likely contract in the near future given withering tax revenues. Also, aggregate labor income — the amount of money earned by all U.S. workers — declined, indicating that the economy can no longer look to paychecks for growth.
Bivens had raised the alarm on declining personal consumption a day earlier in an Economic Snapshot showing declines in both consumer spending and retail sales during the past two years. His forecast of drops in consumption spending — at 2.5% — proved to be conservative compared to the actual 3.1% drop reported by the Commerce Department.
On the same press call, senior economist Jared Bernstein explained why the troubling GDP news strengthens the argument for an effective economic stimulus. EPI has been pushing for a new recovery package for several weeks, through reports, interviews with the press, and testimony on Capitol Hill.
On Monday, Director for Policy and Research John Irons and policy analyst Ethan Pollack issued a Policy Memo detailing proposals to pump new life into the stalled economy. The plan emphasizes investments in infrastructure, which creates jobs while setting the stage for future growth. In addition, EPI favors direct aid to states, which are in dire economic situations, as well as expanding safety net programs such as unemployment insurance and food stamps. As the previous week’s Snapshot illustrated, these methods of stimuli are significantly more effective than tax cuts for business and rebate checks that often go toward paying off debt.
EPI on the Hill
Irons and Bernstein have both been making the trek to Capitol Hill. Last week, Bernstein testified before the House Committee on Education and Labor on the importance of a good stimulus package, then returned to the House Ways and Means Committee on Wednesday. Also on Wednesday, Irons spoke to the House Committee on Transportation and Infrastructure about the short-term and long-term benefits of investing in new roads, waterworks, schools, and other needed public projects.
The need for stimulus is especially important to individuals who are struggling to make ends meet. Bernstein and former research assistant James Lin published a Briefing Paper this week examining how much a family needs to cover basic standard of living costs. They found that nationwide, working families with two parents and two children need $48,778 to meet the family budget. But they also show that young families, minority families, and families with lower degrees of education all face greater difficulties in meeting these economic benchmarks. Furthermore “over three times as many families fall below family budget thresholds as fall below the official poverty line.” The article accompanies the updating of EPI’s popular Family Budget Calculator, which will calculate the income required to cover basic needs by families of various sizes in 600 cities and regions across the United States.