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Meanwhile, the Real Economy Stinks

So Congress has done what it’s good at, unsatisfying deals completely unconnected to the real problems and challenges the country faces. And stocks are down 140 points on the news, after falling yesterday. It’s almost as if Wall Street doesn’t think too much of this deal! Maybe they’re using the same keywords as the rest of America to describe it.

Or maybe they’re just looking at the real economy, looking at the legislative situation in Washington in the immediate future, and putting two and two together.

Americans cut back on their spending in June for the first time in nearly two years and their incomes grew by the smallest amount in nine months, a troubling sign for an economy that is barely growing.

Consumer spending dropped 0.2 percent in June, the Commerce Department said Tuesday. Excluding falling prices for such items as energy and food, consumer spending would have been unchanged in June.

Incomes rose 0.1 percent. It was the weakest growth in income since September, reflecting anemic hiring this spring.

Consumer spending is two-thirds of the economy. As Mike Konczal explained, Ben Bernanke said almost a year ago that the economy was about to execute a handoff from government action to growth in consumer demand, business and residential investment, and net exports. This data and the rest of the data out there shows that this handoff has been fumbled. There isn’t going to be any recovery, absent government action. The economy cannot support it.

There’s a chance that the prospects are actually so dire that the Fed will get involved again. I think there are some things the Fed can do – stop paying banks to park their reserves would be a good start – but it’s clearly sub-optimal policy, and the Fed has not shown the ability or the imagination to this point to truly boost the real economy outside of Wall Street.

What’s more likely is that we keep muddling through a terrible economy, with no real growth or changes in unemployment for years to come. But don’t worry, we’re about to “pivot” to jobs!

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David Dayen

David Dayen