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Vectra Bank Expert Jeff Thredgold

35 Miles Per Hour

Written by Jeff Thredgold, President, Thredgold Economic Associates

November 2, 2010

The American economy is a modified “hot rod” featuring two separate gas pedals—with each pedal pushed fully to the floor.  Despite this fact, the American economy is lumbering down the track at a less–than–blistering 35 miles per hour pace…

…someone please release the brake

Actually, this moving contraption has a variety of hand brakes…all engaged.  One is expected to be released this week, with the uncertainty brake regarding election results to be pulled.  A second brake release could also occur, as uncertainty about what the Federal Reserve will do next as far as additional monetary stimulus is also pulled.

Whether either of these release moves will enhance U.S. economic “miles per hour” remains to be seen.  In addition, Friday’s release of the latest monthly employment data will give us a better picture of where we are on “the road to recovery.”

As noted before, when one considers the massive amount of fiscal stimulus (government spending and breathtaking budget deficits) and monetary stimulus (both short- and long-term interest rates at or near historic lows, with unprecedented money creation), the U.S. economy should be cruising down the road.  Instead, it is well under the speed limit.

Nothing to Write Home About
The U.S. economy grew at a miserly 2.0% real (after inflation) annual rate during 2010’s third quarter, largely matching economists’ forecasts.  Such growth represented the fifth consecutive quarter of U.S. economic growth since the Great Recession officially ended in June 2009 (see chart). 

U.S. GDPBy comparison, U.S. growth over the past 30 years has averaged 3.6% annually after inflation, or twice the pace of the past two quarters.  In my view, weaker U.S. economic growth in recent quarters has resulted from  1) the fact that millions of American business owners and consumers simply lost faith in the “bigger government is better” view of the current Administration and Congressional leadership…and  2) that recovery from the ravages of the Great Recession, the most painful economic and financial hit to our economy and our lives collectively in 80 years, does not happen quickly.

The best news in the third quarter report was that consumer spending rose at a 2.6% annual rate, the strongest performance in four years.  The worst news was that most of the third quarter growth resulted from higher levels of inventory accumulation (think of merchandise stacking up on store shelves and in warehouses that will eventually need to be sold)…not exactly a good omen for manufacturing output in coming quarters.

A Steady Clip
Still, prior discussions of numerous economic naysayers about the likelihood of a double-dip recession have slowed.  Former forecasts of some economists of a rapid recovery from the Great Recession have also fallen by the wayside.  Our long-term view of an economy struggling along at a modest 2.0%-3.0% real annual pace remains on track.

Maybe, just maybe, the idea of less onerous, less overbearing government in coming quarters will help the economy pick up speed.  Maybe we are back on the right track.

Finance Expert Right Boarder