Among the reasons the economy is so vulnerable: Debt-laden consumers with scant savings are prone to slash spending when their incomes drop. Household confidence is more fragile. Individuals are moving less often to find jobs, making it harder for firms to fill vacancies. And the government, for decades the rescuer of last resort with interest-rate cuts, tax reductions and spending increases, has run out of string.
Economists label the late 1980s, 1990s and early 2000s “The Great Moderation,” a period in which the ups and downs of the economy were muted. That epoch is over. James Stock, a Harvard economist who helped coin that label, says that the volatility of economic output, income and consumption looks more like it did 25 years ago. “In this recession and its aftermath, those smoothing mechanisms, those shock absorbers, clearly have been damaged,” he says.
The U.S. economy has been expanding for two years now, and forecasters had been expecting it to pick up steam in the second half, powered by robust overseas demand, investment at home by cash-rich companies and a renewed willingness of consumers to spend as they reduce their debt burdens. But Friday’s GDP report and the impact of Washington’s debt-ceiling stalemate on consumer and business confidence as well as on financial markets are raising doubts about that outlook.
There´s just not enough nominal spending! And yes, the “Great Moderation” is over. Why? Because the best “shock absorber” – nominal spending growing along a stable growth path – got “punctured” and collapsed!