Last week in Artificial Sweeteners we discussed how government intervention has distorted the economy, the stock market and the housing market. The basic thesis:
Excessive economic stimulus and a misguided zero interest rate policy has created false bottoms in the housing and stock markets. See Artificial Sweeteners
Dour economic statistics released this past week only confirm that thesis. While extrapolating from one month’s statistics is dangerous, nevertheless the numerosity and interrelated nature of recent reports raises questions whether there ever was an economic recovery.
Scanning the Headlines
The past week we have been bombarded by negative economic reports from housing to employment to durable goods. A quick look at the headlines:
- Sales of US New Homes Sales Dropped to Record Low in July – The Census Bureau reported that new home sales declined from June’s record low annual rate of 315k (revised down from 330k) to July’s new record low annual rate of 276k.
- Existing Homes Sales Plunge 27.2% – July existing homes sales fell to a 3.83m annual rate from the previous month’s 5.26m rate. Inventories of unsold homes rose to a 12.5 month supply, more than double the normal supply.
- JPM Says “Disastrous Durable” Goods Number Sets Stage for sub-1% Q3 GDP Print – Shipments of core capital goods (without aircraft and defense) fell 1.5%. Auguring poorly for future growth, capital goods orders dropped a precipitous 8%.
- US Jobless Claims Jump to 500,000; Nine-Month High – New claims for jobless benefits soared to 500,000 exceeding economists’ predictions. It was the third straight week that claims went up.
- With Economy Teetering, Trade Deficit Widens – In June, the trade deficit widened to almost $50b. In May the deficit was $42b. Both imports increased and exports decreased. The decrease in exports signaled a declining US manufacturing sector.
The Super Sweetener
The Congressional Budget Office calculates that stimulus added 4.5% to GDP. Further, these programs created up to 3.3m jobs. One estimate is that without stimulus, GDP would have been negative 3.5%. What happens next?
So now that the stimulus is tapering off, America has the following rather unpleasant things to look forward to: a 4.5% reduction in run rate GDP as the direct economic boost disappears, the gradual loss of 1.4 to 3.3 million jobs, and the eventual realization that non-recurring, one time items can not be projected into perpetuity, despite what Keynesian dogma may preach. See CBO Estimates that Stimulus Boosted Q2 GDP by 4.5%, Standalone Number is likely under around -3.5%
Shoveling Money to No Avail
Morton Zuckerman captures the folly of current economic policy:
Tons of money have been shoveled in to rescue reckless banks and fill the huge hole in the economy, but nothing is working the way it normally had in all our previous crises. See End of American Optimism
All we have created is a “new normal” of slow or little growth. Compared to sales growth of 4% in past recessions, sales are increasing at a little over 1%.
…there are at least 14.5 million Americans still searching for work: 1.4 million of them have been jobless for more than 99 weeks, 6.5 million have been jobless for over 27 weeks. This is a stunning reflection of the longer-term unemployment we are coping with.
The unemployment numbers are worse than reported. Last year the Labor Department admitted it over-counted the number of jobs by 1.4 million….
Since April, the Labor Department has counted 550,000 nonexistent jobs under this so-called birth/death series. Without these phantom jobs, the economy this year created virtually no jobs—certainly not the 600,000 the administration has been touting.
The Obama administration projects the unemployment rate will drop to 8.7% by the end of next year and 6.8% by 2013. That is totally unrealistic. See The End of American Optimism.
A policy of artificial sweeteners has misled the American public and merely put off the day of reckoning. Trillions of stimulus dollars have masked underlying weakness in the American economy. Instead of these sweeteners, banks should have been forced to write off bad debt, insolvent firms should have gone bankrupt, government interference in the economy should have dwindled, and programs increasing employment costs should have stopped.
If the economy were permitted to self correct, we would be on our way to recovery rather than be suffering the sour aftertaste of artificial sweeteners.
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Related posts:
- Artificial Sweeteners
- The New Reality: Permanent Job Loss
- Labor Day 2010
- Zero Interest Rates Equals Zero Jobs
- Endangered Icons
Tags: Durable Goods, Economic Stimulus, Existing Home Sales, Federal Reserve, Morton Zuckerman, New Homes Sales, unemployment
