Martin Feldstein, chairman of the Council of Economic Advisers under President Ronald Reagan, is a professor at Harvard and a member of The Wall Street Journal‘s board of contributors.
In an op-ed he wrote for the Wall Street Journal, June 8, 2011, Feldstein explains why and how the economy is worse than we think. The reasons are:
- GDP growth is declining, dropping to just 1.8% in the first quarter of 2011, from 3.1% in the final quarter of last year.
- Two-thirds of the 1.8% GDP growth in the first quarter of this year went into business inventories rather than sales to consumers or other final buyers. This means that final sales growth was at an annual rate of just 0.6% and the actual quarterly increase was just 0.15%—dangerously close to no rise at all. A sustained expansion cannot be built on inventory investment. It takes final sales to induce businesses to hire and to invest.
- The picture is even gloomier if we look in more detail. Estimates of monthly GDP indicate that the only growth in the first quarter of 2011 was from February to March. After a temporary rise in March, the economy began sliding again in April, with declines in real wages, in durable-goods orders and manufacturing production, in existing home sales, and in real per-capita disposable incomes.
- The index of leading indicators fell in April, only the second decline since it began to rise in the spring of 2009.
- The data for May are beginning to arrive and are even worse than April’s. They are marked by a collapse in payroll-employment gains; a higher unemployment rate; manufacturers’ reports of slower orders and production; weak chain-store sales; and a sharp drop in consumer confidence.
Feldstein concludes with this doleful prediction:
“The policies of the Obama administration have led to the weak condition of the American economy. Growth during the coming year will be subpar at best, leaving high or rising levels of unemployment and underemployment. Expect more bad news until someone enacts a plan to bring deficits under control without raising taxes.”
Read the rest of Feldstein’s article HERE.