Does the U.S. Economy Still Have a Demand Problem?
It the wake of the financial crisis, it became clear that weak demand, on the part of both businesses and consumers, was at the heart of the slow economy recovery. The evidence was found everywhere from low consumer spending to low inflation to low order growth for goods and services. When asked if she agreed that the economy was suffering a demand problem during a 2013 Congressional hearing, Fed Chair Janet Yellen put it this way: “I completely agree that weak demand for the goods and services that this economy is capable of producing is a major drag holding back the economy.”
While data released since then suggest that some demand has returned, the picture is still mixed. Personal consumption expenditures (PCE) grew 0.2 percent, or $18.3 billion, in May against a similar percentage increase in April, data released by Bureau of Economic Affairs on Thursday showed. Analysts had expected growth around 0.4 percent. On a year-over-year basis, headline PCE inflation came at 1.8 percent in May versus 1.6 percent last year, inching closer to the Federal Reserve’s target of 2 percent.
The PCE data has come amidst another set of disappointing revisions in gross domestic product (GDP) growth for the first quarter. On Wednesday, the Bureau of Economic Analysis revised GDP growth further downwards to -2.9 percent from an earlier estimate of -1 percent.
In a monetary policy statement issued on June 18, the Federal Reserve emphasized concern about inflation staying below its targeted 2 percent. “The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term,” the Federal Open Market Committee statement said.
Though consumer spending remained somewhat sluggish, personal income in May grew a moderate 0.4 percent or $58.8 billion against a 0.3 percent increase in April. According to data released by the Department of Commerce’s Bureau of Economic Affairs, private wages and salaries increased $27.8 billion in May, against an increase of $17.9 billion in May.
Wages in the goods and manufacturing sectors have resumed growth after having contracted in April. Goods-producing payrolls increased $7.4 billion, against a decrease of $1.5 billion and manufacturing payrolls increased $5.0 billion, in contrast to a decrease of $2.8 billion, BEA data showed. A wage increase is generally followed by higher consumer spending unless people begin to save more. The personal savings rate increased from 4.2 percent in March to 4.8 percent in May. This can partially explain the gap between higher personal incomes and relatively lower consumer spending.
With an increase in wages, personal outlays — which include PCE, interest payments, and transfer payments — also went up to $18.0 billion in May, compared with an increase of $2.1 billion in April.