Economy Remains on Life Support

This has been a whirlwind week for intangible monetary policy news which was lead by:

  • The Federal Reserve Press Conference by Chairman Bernanke which contained almost no new economic insights; and,
  • An FOMC meeting with no policy changes or insights.

My foggy long range economic view is of a moderately improving economy which is fighting growing fiscal headwinds.  My takeaway from from the press conference and FOMC meeting was a fairly strong opinion by Chairman Bernanke that the economy was gaining enough traction to stand on its own without further accommodation.

A deeper look at advance 1Q2011 GDP real growth of 1.8% should quickly dispel this.

The economy is still in recession if the economic effects of the automatic stabilizers are taken into consideration.  Automatic stabilizers are automatic changes in the government’s revenues and outlays that are attributable to cyclical movements in real output.

A caveat when interpreting the above chart is that no study has determined what portion of automatic stabilizers actually get into GDP – GDP measures only 1/3 of the economic money flows.  But understanding the size of automatic stabilizers in comparison to GDP are indicative of current economic duress.

A better measure of economic health is comparing the fiscal boost being given to the economy due to the American Recovery and Reinvestment Act (aka “the stimulus”).

The orange range in the above graph is the estimated range of effects on GDP of the stimulus.  My take from this graph is that it is likely the economy was negative in 1Q2011 without stimulus.

Some of the automatic stabilizers were funded within the stimulus – and looking at GDP is a rear view mirror of the economy.  What is important is where the economy is headed.

And this leads me to the final nail in the coffin – government spending.  In Chairman Bernanke’s press conference, he stated that there were no government deficit reduction bills or programs which would derail his positive (but downwardly revised) economic projections.

Before any of these deficit reductions begin effecting the economy, the USA has the government putting a 1% headwind on GDP in 1Q2011 – the largest government spending headwind since the end of World War II.

The economy is much weaker than picture Chairman Bernanke painted, and it is likely he crossed his fingers when saying further extraordinary monetary policy accommodation would not be necessary.

Economic News this Week:

Econintersect issued its economic forecast for April 2011 indicating a peaking of this current economic sub-cycle.  In simple words, the same moderate recovery seen in March will continue in April.

This week the Weekly Leading Index (WLI) from ECRI declined slightly from 7.7%  to 7.5%.  This level implies the business conditions six months from now will be approximately the same or slightly improved compared to today.

Initial unemployment claims increased moderately in this week’s release.  The data for the last two months as been quite noisy, and it remains important to follow the four week moving average for analysis of unemployment to smooth out the reporting idiosyncrasies.  Although the trend over the last six months has been down, we are in a short term uptrend – please refer to Initial Unemployment Claims Rise – A Harbinger of Poor April Jobs Outlook.

The data released this week were consistent with a moderately improving economy.   Housing data was as expected – not good – but this economic cycle is operating with poor housing dynamics which continues to degrade slightly.  There are some indications of light at the end of the housing tunnel.

Weekly Economic Release Scorecard:

Item Headline Analysis
1Q2011 GDP

Rick Davis suggests the weak numbers are a perfect excuse for more monetary intervention
March Personal Income & PCE
Consumption increase is 66%  price increases.  Disposable income 80% nullified by inflation
1Q2011 GDP
Up 1.8%
Government spending contraction the news in this low number
This super economic coincident index is now showing economy growing at trend
March Pending Home Sales
Not up – Pending home sales index has been down YoY for the last 8 of 9 months
March Durable Goods
Sharp improvement
Home Mortgage Defaults

Likely strategic mortgage defaults will be a growing problem
April Conference Board Consumer Confidence
Comparing consumer confidence “recovery” and trends over the last 5 recessions
February Case-Shiller home prices
Compares all leading home price indexes.
Income Inequalities
Showing growing income disparity in the USA
March New Home Sales
Not up – but there is light in the tunnel
China Inflation

Menzie Chinn questions whether Chinese inflation is endangering the USA economy
Deficit Reduction

Elliott Morss looks at taxing options to lower the deficit

Yves Smith pokes holes in FDIC belief they could have prevented the destruction caused by Lehman’s collapse
Corporate Forward Earnings

Jeff Miller points out most investors are not using good forward earning information
Australian All Ordinaries
Paul Hanly overviews the Oz market from a historical perspective

Erik McCurdy argues a correction is coming
Are things out of control?

John Lounsbury shares a video on the progression of the information age
Arizona Senate Bill 1259

Martin Andelman questions whether the banking lobby was involved in the disappearance
Economic End Games

Rick Davis examines the “art” of economic solutions – and who profits

Bankruptcy this Week: Peregrine

Failed Banks this Week: