Does the U.S. Economy Still Have a Demand Problem?

Source: Thinkstock

Source: Thinkstock

It the wake of the financial crisis, it became clear that weak demand, on the part of both businesses and consumers, was at the heart of the slow economy recovery. The evidence was found everywhere from low consumer spending to low inflation to low order growth for goods and services. When asked if she agreed that the economy was suffering a demand problem during a 2013 Congressional hearing, Fed Chair Janet Yellen put it this way: “I completely agree that weak demand for the goods and services that this economy is capable of producing is a major drag holding back the economy.”

While data released since then suggest that some demand has returned, the picture is still mixed. Personal consumption expenditures (PCE) grew 0.2 percent, or $18.3 billion, in May against a similar percentage increase in April, data released by Bureau of Economic Affairs on Thursday showed. Analysts had expected growth around 0.4 percent. On a year-over-year basis, headline PCE inflation came at 1.8 percent in May versus 1.6 percent last year, inching closer to the Federal Reserve’s target of 2 percent.

The PCE data has come amidst another set of disappointing revisions in gross domestic product (GDP) growth for the first quarter. On Wednesday, the Bureau of Economic Analysis revised GDP growth further downwards to -2.9 percent from an earlier estimate of -1 percent.

In a monetary policy statement issued on June 18, the Federal Reserve emphasized concern about inflation staying below its targeted 2 percent. “The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term,” the Federal Open Market Committee statement said.