The economic outlook remains lackluster with moderate growth expected in the near term and the risk of renewed recession depending on factors like gas prices, developments in Europe, and government policies. Recessions caused by financial crises are more severe and prolonged than typical downturns. While recent economic data is consistent with moderate growth, consumer spending has weakened due to higher food and energy costs reducing real income growth. Lower gas prices may provide more consumer spending boost later if sustained. The job market recovery is slow as seen in past recessions, with businesses reluctant to hire without sustained increased demand. The consumer outlook is mixed with spending not falling sharply but real income growth slowing.

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Weekly Commentary by Dr. Scott Brown
The Economic Outlook – In A Holding Pattern
October 3 – October 7, 2011
Recessions that are caused by financial crisis are different than the usual downturn. Weakness is more severe
and longer lasting. Monetary and fiscal policy stimulus can help limit the downside, but can’t create
prosperity. Yet, policy efforts can buy some time for the private sector to recover. Long-term budget strains
add to the difficulty of deciding how much to do and when to take support away. Nobody said it would be
easy.
Recent economic figures have been consistent with the view of lackluster-to-moderate growth in the near
term – not a recession, although the risk of a renewed downturn remains. Whether the U.S. slips back into

2. recession depends on a number of factors: gasoline prices, developments in Europe, and policies that may or
may not come out of Washington, D.C.
The consumer sector is not quite as bad as some expected, but spending is not especially robust and weak
growth in real incomes is a major red flag. After reasonably good growth into the early part of this year,
consumer spending hit the skids in April, May, and June. That slowdown reflected the impact of higher food
and energy costs. Gasoline began the year at a little over $3 per gallon and rose to $4 in early May. Gasoline
prices have since fallen, but the impact on spending is asymmetric. That is, over the short term, the negative
impact of higher gasoline prices is greater than the positive impact when prices fall back. Lower gasoline
prices, if sustained, should provide more of a boost to inflation-adjusted spending later this year and in early
2012. While West Texas Intermediate has dropped to the low $80s, Brent, which is the more important

3. driver of gasoline prices, has declined to around $105. There’s room for improvement (from the consumer’s
point of view) if the spread between WTI and Brent narrows (with Brent falling).
Nominal wage income growth had been moderate, but slumped in August. The September Employment
Report (due Friday) will include information on payrolls, hours, and wages, and should tell us whether the
August drop in wage income was a one-off or the start of a trend. Adjusted for inflation, income growth has
slowed significantly in recent months – and it’s hard for spending to grow without fuel.
One hears an awful lot about how weak this job market is, but it’s worth noting that the two most recent
recessions also had very gradual job market recoveries. There is a considerable debate about why. Some
suggest that it’s a story about regulation, but businesses always complain about regulation. Others, and I
believe this is the correct interpretation, point to weak underlying demand. Businesses aren’t going to hire
until they see a sustained increase in the demand for the goods and services they produce. Nobody’s turning
away current sales now because they’re worried about future labor costs and taxes.
The consumer outlook is muddled. Spending growth hasn’t been especially strong, but it’s not falling off a
cliff. Real income growth has slowed, but lower gasoline prices may provide some relief over the next several
months. Corporate profits and cash flows are strong, helping to support business fixed investment. However,
we’re still facing a significant drag from fiscal policy and Europe is a major question mark. The anxieties of
September are likely to continue into October and beyond.