No Confidence

Written by Jeff Thredgold, President, Thredgold Economic Associates

August 31

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% real (after inflation) annual rate late last year, to a still respectable 3.7% pace during the winter, to an anemic 1.6% annual rate in the quarter just ended…

Observe that the revised 1.6% 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% was announced on August 27.  The first estimate late last month was of a 2.4% 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% 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% annual rate, versus the 1.6% 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% 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% 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 $2,000,000,000,000 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, and so on…

One of my favorite economists, Irwin Stelzer of the Hudson Institute in Washington DC, notes in a recent piece that “large swathes of the economy are now subject to political rather than market forces.”  He notes tightening regulations of the health care industry, many subject to the whims of politicians and bureaucratic staffers. 

He notes that “regulators are busy drawing up the estimated 10,000 regulations needed to implement the 2,319-page financial reform bill” with acceptable lines of business, fees, and compensation now unknown.  He notes that “the housing sector is also hostage to government policy.”  Tax rates?  Low mortgage rates continuing?  The future of Freddie Mac and Fannie Mae?

He notes the anxiety within the energy sector.  “Utilities have no idea what penalties will be imposed if they construct new fossil-fuel plants, mining companies don’t know what market there will be for coal if Congress enacts an energy bill, and oil companies haven’t been told what regulations will be imposed on off-shore drilling.  The only things that are known are that taxpayers will pay for subsidies to wind, sun and other forms of power generation that are not economically competitive.”        

Too Much Government
An editorial in The Wall Street Journal last weekend summed things pretty well.  It noted that “He (Treasury Secretary Timothy Geithner) and President Obama and their economic coterie really believe that government spending can stimulate growth by triggering private ‘demand,’ that tax rates are irrelevant to investment decisions, that waves of new regulation can be absorbed by business with little impact on costs or hiring, and that politicians can assail capitalists without having any effect on the movement of capital.”  

The editorial continues later, “If prosperity were a function of government stimulus, our economy should be booming.”  And finally, “Never before has government tried to do so much and achieved so little.”