Where Will Recovery Come From?

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The LA Times does a good job framing yesterday’s economic news:

Retail sales unexpectedly tumbled in May in the biggest drop in eight months, raising a vexing question for the nation’s still-shaky economy: If consumers are not going to lead the way back to prosperity and additional stimulus spending by the government isn’t likely, what’s going to keep the recovery alive?

Last month, Americans slashed spending on everything from cars to clothing to building materials, the Commerce Department reported Friday. Auto sales fell almost 2%, a major drop for a single month.

I’m probably oversimplifying, but whenever I see news like this I keep thinking the same thing: the rich can only do so much. Recovery has to be built primarily on the backs of middle class consumer spending, and the only way for that to rise steadily is for (a) employment to go up, (b) wages to go up, (c) borrowing to go up, or (d) savings to go down. But employment is forecast to remain sluggish, wages are pretty flat and likely to remain so (thanks to high unemployment), consumers are still deleveraging, and although savings rates have recovered, they need to recover more to get back anywhere near historical levels. Add to that the likelihood that housing prices are going to drop some more now that the new home buyer’s tax credit has expired, and there’s really nothing left to drive long-term economic expansion. The millionaire class may be recovering nicely, but they just don’t spend enough to do the job on their own.

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