Busch: Give US Another Hit!
The progression of the economy has moved from a recession to a credit crisis to a financial panic back to a recession. The GDP numbers of last week encapsulate exactly where we're at: Q1 -6.4% and Q2 -1.0%. Due to the incredible sharp reduction in costs and inventories in Q1, earnings beat expectations by a historical amount and generated a massive up move in equities.
It is truly a case of falling so far that everything looks up from here.
With the critical 3mth Libor-OIS spreads returning to the pre-Lehman Brothers failure levels, stock market gurus are saying why can't the S&P return to it's pre-Lehman level of 1,200?
One reason may be today's (Friday's GDP had this) personal income and spending data. It provides a glimpse into the future that isn't nearly as promising. Prior to the summer of 2007, consumer spending was around 70 percent of the economy.
Due to the massive layoffs and increase in savings, we have seen real consumer spending decline every month since February.
Most projections are for the layoffs to continue into 2010.
This is the primary driver for why many economists/strategists/analysts are looking for tepid growth in the future.
Yes, cash for clunkers will generate an increase in spending for Q3, perhaps even a spike. However, this crystal meth economic stimulant has a cost as it will move forward sales from future quarters and it will likely increase the fiscal deficit. The bill will come due eventually, but Congress and consumers are addicted already. In a similar vein, the Chinese hyper stimulated their economy with massive new loans.
They are now going through rehab as the regulator has warned banks about their loans, they are disallowing the use of owning other bank debt for capital reserves, and they have dramatically reduced the amounts of new loans for July.
These interventions into the economy by the governments around the world are creating volatility and uncertainty. While the US progresses down the path of addiction, the Chinese are attempting to detox. The US politicians should look to see what the cold shakes bring to China's economy before they pass more spending.
The $2 billion in additional cash-for-clunkers is going to pass by a wide margin.
So light up everyone, so what if your teeth fallout and you have to appear on "Intervention" in the future.
It's all about the now in DC.