Second quarter investment will get a lift from a modestly stronger manufacturing sector, especially in autos and technology related equipment.
Bell weather Intel reports strong salesfor the enterprise applications-businesses have finally followed consumers in updating essential hardware.
Otherwise investment will take a hit from much weaker new home salesand construction-the nation has a serious overhand of housing units that will take some years to work off. Third quarter housing construction should improve, and the recent dip in sales is an overreaction to the end of the home buyer tax credits.
Overall, the federal policymakers' policies have few arrows left in their quill.
Federal stimulus spending remains controversial and unlikely to expand because voters are wary of more deficits and borrowing (which must come from the Middle East and China), and Christina Romer continues to issue outrageous, ill-founded claims that the stimulus package is generating up to 3.5 million jobs-eroding President Obama's credibility.
Moreover, thanks to Rahm Emanuel and Nancy Pelosi, the $787 billion stimulus was structured to maximize the president's image with environmentalists and pay off constituents. Jobs creation was a secondary consideration. Obama got what he paid for-love from the left and too few jobs for middle America.
The Federal Reserve cannot lower short term rates-those are already at near zero levels-and it is doubtful that new purchases of mortgage backed securities would do much. Mortgage rates are already very low. The overhang in the supply of housing requires that any immediate gain in construction and jobs accomplished by further subsidizing housing purchases, through tax credits or Federal Reserve intervention, will only borrow from sales and construction from a quarter or two into the future.
The Treasury has forsaken the third tool of monetary policy-exchange rates-by letting Beijing enforce an undervalued yuan.
The trade deficit is a huge drag on the U.S. economy-creating a growing hole in aggregated demand. It is a primary reason, along with the Administration's lack of comprehensive action to address the woes of the 8000 regional banks, the economy cannot accomplish growth of 4 or 5 percent, as it should when emerging from a recession.
The deficits on imported oil and with China account for nearly the entire imbalance. The president's energy policies do not fully exploit, by some long and considerable measure, the potential to substitute domestic energy for foreign oil. The President's failure to accomplish genuine exchange rate reform in China mean that the U.S. will face a long period of mediocre growth that will only further increase the national debt, with too much held in China. Unemployment will stay alarming high.
