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Lots of stim—still so grim

Jeff Thredgold //September 9, 2010//

Lots of stim—still so grim

Jeff Thredgold //September 9, 2010//

Note the direction of U.S. economic growth during the past few quarters as identified in the quarterly growth chart-from a solid 5.0 percent real (after inflation) annual rate late last year, to a still respectable 3.7 percent pace during the winter, to an anemic 1.6 percent annual rate in the quarter just ended.

Observe that the revised 1.6 percent real annual growth pace of the U.S. economy during April-June 2010 comes at a time of the most aggressive combined fiscal (government) stimulus and monetary (the Fed) stimulus on record.

Take one more peek at the direction of the U.S. economy. Economic growth is declining rapidly even as the U.S. government will spend $1.4 trillion more this year than it takes in…just like last year…with a similar deficit forecast for next year…with $1 trillion deficits for years to come.

Humor me with one final peek at the chart. The U.S. economic slowdown is occurring even as monetary stimulus (money creation) is the most aggressive in the Federal Reserve’s 97-year history. Short-term interest rates are effectively zero. Long-term interest rates are at 50-year lows. The Fed announced new steps to stimulate the economy in recent days. Still, the U.S. economy sags. It shows what can happen when the business sector and the consumer sector lose confidence in Washington DC.

Revisions Many

The U.S. Commerce Department’s first official revision of U.S. second quarter GDP (the most complete measure of goods produced and services provided across the U.S.) to 1.6 percent was announced on August 27. The first estimate late last month was of a 2.4 percent real annual growth pace.

The U.S. Commerce Department’s second and third official revisions will occur during late September and late October. The number crunchers will then revise the data again at least one more time over the next few years.

It would be nice if weak second quarter American economic growth was simply a pause before a reaccelerating growth pace…don’t hold your breath. Most estimates for third quarter U.S. economic growth are just slightly stronger than the 1.6 percent second quarter pace. In fact, given extremely soft (and depressing) data regarding existing home sales and new home sales reported over the past two weeks, a few more bearish economists expect a slight contraction in third quarter growth.

It shows what can happen when business executives and consumers are fearful of more and more costly and painful government encroachments into the private sector.

More Complete Data

The sizable downward adjustment to second quarter 2010 GDP was primarily tied to three factors, two of which could actually be considered somewhat positive. Government bean counters had overestimated the level to which U.S. businesses had added to inventory levels, i.e. the stuff on store shelves and in warehouses, subject to future sale. Lesser levels of inventories suggest that production will need to be boosted further in coming quarters when and if sales improve.

The second positive revision was to overall consumer spending, which grew at a revised 2.0 percent annual rate, versus the 1.6 percent initial estimate. A large detractor from second quarter growth was the fact that imports rose more quickly than initially estimated.

Imports of oil, autos, electronics, etc. surged at a 32.4 percent annual rate, the largest increase in a quarter century. Producing “stuff” in the U.S. boosts GDP. Buying it from Saudi Arabia, Japan, China, etc. does not. U.S exports of goods and services, which do add to GDP, grew at a modest 9.1 percent annual rate.

The Unknown

Logic would suggest that the unprecedented amount of stimulus in the U.S. economy should be leading to much stronger growth and solid employment gains. Instead, people are scared. Uncertainty is sky-high.

Large U.S companies are sitting on nearly $2 trillion in cash, fearful of where the nation is headed. Corporate anxiety leads to cautious spending and the hoarding of cash. The number of mergers and acquisitions is rising modestly as shareholders are complaining about these enormous cash balances not being used to pay dividends.

It shows what can happen when the business sector is fearful of more and more regulation…more and more costly mandates from an anti-business Washington in regard to health care, rising taxes, possible energy legislation, unwieldy red tape in the financial services arena.
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