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The Stop-Go Recovery

THE United States economy just went "thump." Gross domestic product, the sum of all goods and services produced nationwide, grew at a seasonally adjusted annual rate of only 1.8 percent in the January-March period. That's way down from the 4.7 percent annual rate in the previous quarter - a five-year quarterly high.

The bond market may like it. In a perverse way, bad news is often good news for bonds. If the economic recovery remains weak and inflation low, bond prices tend to go up with the prospect of steady or lower interest rates.

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However, a 1.8 percent rate isn't likely to do much if anything to reduce unemployment.

The stop-go recovery is giving Washington fits. It may provide President Clinton some political ammunition should he choose to blast the Republicans for blocking his $16.2 billion jobs program in the Senate. Undoubtedly, the administration would prefer a vigorous, steady recovery that would slash unemployment and trim the federal deficit - and make the new White House team look good.

Republicans may blame the Clinton plan to raise taxes for the slowdown. Taxpayers, they say, are reducing their expenditures in preparation for their extra financial burden.

This up-down recovery is also giving the Federal Reserve a problem. The Fed has taken a huge risk in allowing growth in the money supply - the fuel for the economy - to weaken this year. One measure of money that includes currency and checking accounts, M-1, has grown 10 percent over the last year, but over the last three months has slowed dramatically to a 2.5 percent pace. Broader measures of money have been shrinking since December. After taking account of inflation, all measures of the money supply h ave been shrinking. A few economists even talk of a Fed-created recession.

The majority of economists, however, argue continued modest expansion.

More cheerful economists will note a sharp decline in defense spending accounted for much of the GDP decline. Excluding that, GDP advanced at a better 3.5 percent annual rate.

Nonetheless, if the economy doesn't soon pick up speed, the Fed will face flak in Congress. "Why didn't it lower interest rates further to offset a predictable decline in military expenditures?" would be one good question.

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The Fed has made mistakes before. It turned a recession into the Great Depression by reducing the money supply at a time of major bank failures. It allowed inflation to zoom to 18 percent in 1980. The Fed's relative independence is valuable. But it shouldn't be gambling with the nation's economic welfare by allowing real money to shrink for months on end.

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