The Federal Reserve (Photo by Dan Smith)
A weak employment report for May and a manufacturing slump point to a general slowing of economic recovery, however, analysts are still optimistic. Despite declining gas prices, consumers did not respond by increasing retail spending as expected in the second quarter of 2012. For the first time in two years, retail sales dropped over two consecutive months when May retail sales dropped 0.2 percent from April. In this state of affairs, some are calling for intervention from the Fed. Add in the worsening debt crisis in Europe and it’s no wonder that consumers are suffering from a lack of confidence.
Not according to plan
The first quarter of 2012 showed strong retail sales figures and consumer confidence seemed to be on the rise. The second quarter is another story. The April jobs report may offer some insight. Unemployment fell from 8.2 percent to 8.1 percent. And, while 160,000 new jobs were expected, only 115,000 new jobs were created in April. May was worse with only 69,000 new jobs, the lowest number of new jobs added in a year.
A major reason for the drop in retail sales is due to the decline in gas prices, which began to fall in February. Ed Morrissey speculated on the meaning of the fall in gas prices in his June 13, 2012 post for HotAir.com titled, “Retail sales fall in May.” Morrissey believes that gas prices have been dropping because of declining demand.
“That’s not a good sign; it’s an indicator that we may be heading toward another recession. While falling prices benefit consumers, consumers seem unwilling to take advantage of the opportunity, choosing to shield their disposable income ahead of a perceived storm,” he opined.
Federal Reserve intervention possible
In light of the April and May numbers, the Federal Reserve is facing pressure to help spur job growth. The expectation is that it will again lower long-term interest rates in an attempt to bolster borrowing and spending. Some analysts consider this approach to be safe because it will do nothing to create an increase in the money supply that could result in inflation.
Jason Lange explored the motivations surrounding the Fed’s decision on intervention in his June 14, 2012 post for Reuters titled, “Data points to soft U.S. economy, possible Fed action.”
According to Lange, “One reason some Fed policymakers have opposed more monetary stimulus has been persistent inflation pressure outside the volatile food and energy category. Signs of that pressure were still present in May, when so-called core prices climbed 0.2 percent, matching the prior month’s increase.”
Three years and counting
Perhaps consumer confidence is in a slump because we are three years into efforts at economic recovery and there is no end in sight. It doesn’t help that matters are worse in Europe where industrial production decreased for a second month in April. Even Germany, usually the bulwark of the European economic community, experienced declines in production.
Analysts, however, are optimistic that that the Fed will take action and European leaders will finally gain ground in managing their debt crisis. There are signs that economic performance targets for Greece will be eased, making it more likely that the country will receive the funding it needs. Leaders at the G-20 Summit in Mexico recently issued a statement supporting plans for a more integrated banking industry.
But, when will the Fed step in? In his June 13, 2012 article for AP Online titled, “Lower gas prices not enough to lift US economy,” Martin Crutsinger discussed possible intervention by the Fed when he said, “Weaker consumer spending and mild inflation could give the Federal Reserve room to hold interest rates at record-low levels and potentially take other steps to boost the economy. Still, most economists don’t expect the Fed to take further steps at its policy meeting next week.”
Preview of economic events
As is typically the case, in the first quarter of 2012, corporate earnings outpaced market predictions. Earnings reports for the second quarter have yet to be released and many expect to see a drop in earnings overall, but there is still optimism that the trend of performing better than the predictions will hold true.
There are those who predicted that this economic recovery would get worse before it gets better and that there would be periods of backsliding followed by regaining of ground. It certainly feels as if those pundits were right.
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