Nine months ago, Congress passed and President Obama signed an economic stimulus package totalling $1.8 trillion. Hastily designed and implemented, the legislation was highly criticized because it was virtually impossible for anyone to have actually read the bill (much less understand it) prior to implementation. The President himself told us that it was imperative we pass these bills in order to restore economic stability. Conservatives, especially fiscal conservatives, howled, claiming the bill was inappropriately designed, that the money being spent could not possibly generate economic growth because it would take too long to move through the system, with the added concern of driving up an already astronomical deficit. The Administration insisted that the spending was necessary to keep unemployment from exceeding 10%. We were being deceived, and we knew it.
It generally takes about six months for changes in fiscal or monetary policy to be felt throughout the broader economy, so after nine months we should be seeing some signs of economic improvement. That is, the weekly economic statistics should be trending upward. Granted, corporate earnings have been stable in the third quarter. But other than those areas specifically stimulated by the targeted efforts of Congress and the Administration (auto sales via “cash for clunkers” and the $8,000 first-time home buyers tax rebate), the broader economy continues to struggle.
Economic statistics released last week, the week of October 19, indicated the following:
- a 1.2% decline in building permits, the pre-curser to home construction
- a 0.5% increase in housing starts, which is favorable, except that we’re talking about historically low levels to begin with
- a decline in the producer price index, suggesting that there is insufficient demand for raw materials to drive prices up
- an increase in crude oil inventories, again suggesting slack demand
- initial jobless claims up 1.7%, remaining stubbornly high at 531,000. This means that employers continue to lay people off at a rapid clip.
- leading economic indicators were up 1.0%, mainly due to an increase in stock prices (this is a good thing)
- existing home sales were up 9.4%, but keep in mind this is due to the afore-mentioned $8,000 tax credit.
In short, economic growth continues to lag, and without something more substantial, such as reductions in personal income tax rates, will remain weak until we create systemic aggregate demand. And given where our national budget deficit is, tax cuts are not likely to happen under this administration. Instead, President Obama is considering how to raise taxes, which will have the effect of discouraging growth further.
Stay tuned, as we continue to monitor our progress.