By William Patalon III
Executive Editor
Money Morning/Money Map Report
Has the massive Obama stimulus plan put us on a collision course with virulent inflation?
It sure looks that way.
Let me explain …
When the U.S. Commerce Department on Friday said the U.S. economy contracted at a 1% annual pace in the second quarter, the report was actually seen as good news: It was a slower decline than in each of the two prior quarters, and economists had expected a contraction of 1.5%.
"This is good news," Nariman Behravesh, an economist with IHS Global Insight Inc. (NYSE: IHS), told The San Francisco Chronicle.
But here’s the wild card: Although government spending did increase during the April-to-June quarter, only about 7.7% – $60.4 billion – of U.S. President Barack Obama’s stimulus package had actually made its way into the U.S. economy by June 30, the quarter’s official conclusion. Of that total, the largest component went to U.S. states to help defray the jump in Medicaid costs, CNNMoney.com reported.
Much of the $43 billion in stimulus tax relief – including the “Making Work Pay” tax credit for individual workers – also took effect during the second quarter, CNNMoney said.
At this point, it’s really difficult to “see how the effect of stimulus has been very large," Edward Lazear, an economics professor at Stanford's Graduate School of Business – who served as an advisor to former U.S. President George W. Bush – told CNN. "Very little has gone out."
And that’s the problem.
In short, it looks like we’re already experiencing an economic rebound – without the Obama stimulus having really even kicked in … yet. In fact, the impatience over the continued U.S. malaise, the slowness of the economic turnaround and the fact that when growth does return we’re almost assured of a “jobless recovery” actually has some Washington legislators already pushing for a second stimulus.
That means the economy will be in rebound mode when nearly three-quarters of a trillion dollars in stimulus money starts to flow in. Dumping all that money into an already-growing economy won’t just serve as a simple tailwind that gives the economy a gentle push; it will be more like the head-snapping start followed by the thunderous charge down the quarter mile that we see from one of the supercharged Top Fuel Funny Cars driven by National Hot Rod Association (NHRA) star John Force. (From a standing start, Top Fuel Funny Cars cover a quarter mile in less than five seconds at speeds well in excess of 325 miles per hour).
And there’s only one outcome from that scenario – rampant inflation. In fact, U.S. consumers are probably headed for the worst bout of inflation since the 1980s. And that makes the so-called “exit strategy” of U.S. Federal Reserve Chairman Ben S. Bernanke all the more important.
To be sure, the Obama stimulus has given the economy a bit of a boost. So far:
- The states have deployed what stimulus money they have received, which helped fuel the biggest surge in state and local spending since 2007.
- Some early pieces of the stimulus – such as the $25 increase in unemployment benefits – have allowed consumers to spend more.
- And one economist – Economic Policy Institute’s Josh Bivens – said Obama stimulus money may have boosted growth by as much as three percentage points during the second quarter.
But other economists say that – given the environment – the second-quarter GDP numbers were much too strong. After all, business spending dropped 8.9% and hours worked fell 7%. Somehow that doesn’t translate into a mere 1% drop in GDP. That latter figure will most certainly be revised downward in the future.
Unless or until that happens, look for the third quarter GDP statistics to give us a better picture of the U.S. economy’s health. Complaints that the promised stimulus money isn’t getting where it needs to be have Obama’s economic team working overtime to iron out the problems that keep cropping up.
Mark Thoma, an economics professor at the University of Oregon, told CNNMoney that “the third quarter will be a critical time period for assessing the stimulus package."
And for assessing the inflation threat – which Money Morning has repeatedly warned is a very real threat. Gold, commodities, and other hard assets will be key holdings. The same is true for dividend-paying stocks. And make sure to go global – the best growth prospects will continue to be overseas.
Market Matters
A report by the New York Attorney General’s Office claims the initial nine institutions that received Troubled Asset Relief Program (TARP) money paid out $33 billion in bonuses in 2008. Of particular note, Citigroup Inc. (NYSE: C) and Bank of America (NYSE: BAC) rewarded a combined 900 employees (combined) with bonuses of at least $1 million, despite having received $45 billion each in government aid (and that doesn’t count the $3.6 billion Merrill Lynch & Co. Inc. employees received). Imagine how much they would have made if the companies were actually doing well?
While President Obama continued his road trip across America to promote health care reform, a group of conservative Democrats (Blue Dogs) came up with their version of a bill, but offered no timetable for completion.
Meanwhile, regulators pushed forward with proposed rules aimed at reducing speculation in the marketplace and focused on so-called “naked” short selling and on lpacing strict limits on commodities contracts.
In corporate news, deals were the theme of the week. Microsoft Corp. (Nasdaq: MSFT) made amends with Yahoo! Inc. (Nasdaq: YHOO) and forged a 10-year partnership to cut into Google Inc.’s (Nasdaq: GOOG) share of the Internet search business. And International Business Machines Inc. (NYSE: IBM) is expanding its software empire with the purchase of SPSS Inc. (Nasdaq: SPSS) for $1.2 billion.
On the earnings front, energy companies highlighted the week’s reports and the results were not pretty (though were expected). On a positive note, Motorola Inc. (NYSE: MOT) surprised analysts by reporting an unexpected profit, while offering a promising outlook, and Deutsche Bank AG (NYSE: DB) continued the favorable trend among (previously depressed) financials by posting strong earnings on solid investment banking operations.
Investors digested the mixed earnings news and chose to focus more on the positives. Despite a temporary setback in China (5% index decline before encouraging comments by its central bank), the Dow Jones Industrial Average moved higher late in the week after General Electric Co. (NYSE: GE) was upgraded to a “Buy” by a major analyst, a sign of an improving climate. The Nasdaq Composite Index even flirted with 2,000 for the first time since October 2008, and the Standard & Poor’s 500 Index edged closer to 1,000, a level not seen since last November.
The Dow ended July with its best monthly performance since October 2002. Japanese stocks moved to their highest levels in about 10 months and European equities soared to nine-month highs. Bond investors breathed sighs of relief as a record $115 billion Treasury auctions came to a close and foreign bankers emerged as buyers on the final day.
Market/ Index | Year Close (2008) | Qtr Close (06/30/09) | Previous Week (07/24/09) |
Current Week (07/31/09) |
YTD Change |
Dow Jones Industrial | 8,776.39 | 8,447.00 | 9,093.24 | 9,171.61 | +4.50% |
NASDAQ | 1,577.03 | 1,835.04 | 1,965.96 | 1,978.50 | +25.46% |
S&P 500 | 903.25 | 919.32 | 979.26 | 987.48 | +9.33% |
Russell 2000 | 499.45 | 508.28 | 548.46 | 556.71 | +11.46% |
Global Dow | 1526.21 | 1,629.31 | 1,747.64 | 1,773.69 | +16.22% |
Fed Funds | 0.25% | 0.25% | 0.25% | 0.25% | 0 bps |
10 yr Treasury (Yield) | 2.24% | 3.52% | 3.67% | 3.50% | +126 bps |
Economically Speaking
Has Fed Chairman Bernanke suddenly become Mr. Optimist these days? Early in the week, he proclaimed that the financial debacle ultimately would produce favorable results as “not only will we will be back on track, but the economy will be stronger than it had been before this started.” He also urged Congress to move forward with a regulatory reform package to ensure that such dire times will not be repeated.
The Fed’s Beige Book showed that the economy remained weak, though signs of stabilization and improvements in manufacturing, housing, and even labor are occurring across several regions of the country. Some districts reported enhanced corporate hiring, particularly within the healthcare and technology sectors.
The afore-mentioned second-quarter GDP report was better than expected, giving yet another indication that the recession is drawing closer to an end.
Still, it’s a much deeper recession than most realized: For the first time since records have been kept (1947), economic activity has declined for four consecutive quarters. New homes sales skyrocketed in June by 11%, the fourth increase in the last six months, and home prices even climbed on a month-over-month basis for the first time since July 2006 according to the S&P Case-Shiller index.
Durable good orders fell in June, though once the volatile transportation category was removed from the statistic, orders actually increased. Consumer confidence fell in June, as ongoing pressures on the labor markets brought continued concerns and many Americans are refraining from major purchases (now and for the foreseeable future).
On the other hand, jobless claims rose in the most recent week, though analysts pointed to discrepancies from the auto industry. Looking at the four-week moving average as a better gauge, claims for unemployment benefits actually fell to the lowest level since January and continuous claims unexpectedly declined, as well.
Weekly Economic Calendar
Date | Release | Comments |
July 27 | New Home Sales (06/09) | Highest level of sales since November 2008 |
July 28 | Consumer Confidence (07/09) | 2nd consecutive monthly decline |
July 29 | Durable Goods Orders (06/09) | Decline due to cutbacks in volatile aircraft orders |
Fed’s Beige Book | Weak economy, though signs of stabilization | |
July 30 | Initial Jobless Claims (07/25) | 4 week average, best since January |
July 31 | GDP (2nd Qtr) | Contracted, but at a slower than expected pace |
The Week Ahead | ||
August 3 | Construction Spending (06/09) | |
ISM – Manu (07/09) | ||
August 4 | Personal Income/Spending (06/09) | |
August 5 | Factory Orders (06/09) | |
ISM – Services (07/09) | ||
August 6 | Initial Jobless Claims (08/01) | |
August 7 | Unemployment Rate (07/09) | |
Non-farm Payroll (07/09) | ||
Consumer Credit (06/09) |
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News and Related Story Links:
- CNNMoney.com:
-
The Economic Times:
US recession may be easing, but job market weak. -
The Wall Street Journal:
Poised for a Rebound. -
Money Morning Market Analysis:
Beware of the Obama Stimulus Trap. -
The San Francisco Chronicle:
GDP's small drop points to easing of recession. -
IRS.gov:
Making Work Pay Tax Credit. -
WhiteHouse.gov:
Barack Obama. -
WhiteHouse.gov:
George W. Bush. -
Money Morning News Analysis:
Four Ways to Profit if Bernanke’s ‘Exit Strategy’ Backfires. - Money Morning Special News Category:
- Wikipedia:
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.
If the market wishes to see "main street" return as investors, then the "market" and "government" both need to be purged of the "Bad Apples". While everyone would like to be able to "retire", secure in the knowledge that prudent investments will surely provide the money needed to do so, one must know that the risks of the market are always present and one may lose a portion or all of investments made there. That is known as "risk". However there should not be a means for causing or allowing to happen any of the abnormal and illegal acts which have recently fleeced the millions of investors (worldwide) who were recently "taken" by the "movers and shakers" of Wall Street. While it is nearly impossible to clearly link the complicated interaction of our government officials and the improper workings of the "investment world" and correctly place blame where it rightfully belongs and summarily implement "punitive" action,….. well, if there is no examination into the "people" and their various motives for causing these "bubbles" and their eventual "bursting" and our imagination is allowed to fill in the blanks and we are satisfied that no one will ever be rightfully exposed and thusly punished, then how can we be expected, after being virtually "ruined" beyond hope [for financial recovery] to ever again partake in a world filled with shills in both investments and government? —-Now we are 8 months into "Phase Two" of the ruination of Capitalism and the Nation that has relatively well implemented it, by an "out of control goverment" and it appears that the "people" who object to it are willing to "wait" for the opportunity to "vote them out of office". Given what has happened in 8 months, 40 more months will be waaaaaay too late. Confidence,—-anyone?
I've made plenty of money in the rising market. So I'd like to think that the rescession is just about over. But I think that talk is very early. There is still a lot of adjustment left to experience in real estate values. And there seem to be an awful lot of potential foreclosures hanging out there weighing down the economy.
But the real problem is that the decades long acceleration of consumer debt that was supporting the economy appears to be over. Greenspan, et al succeeded in holding down inflation alright. But they also held down consumer incomes. If we are going to recover into the brilliant future we'd all like, something has to be done about consumer's incomes. You cannot expect consumers to fuel a wonderful recovery out of thin air.
I certainly hope that the era of deficit financing consumption is over. And with banks still realizing the losses from this party, it seems very unlikely that they are going to be willing or able to flood the consumer market with easy credit any time soon. (Although the repetition of past error in the pursuit of profit is certainly possible.)
With consumer income stagnant I just don't see where the cash for a new boom is going to come from.
I don't want inflation either. But maybe enough inflation to get to full employment is the answer. If we could get back to the 3% unemployment rate of the early 50s, market pressures would increase consumer's incomes enough to get us there.
I don't know the answer. But it has to involve getting income into the hands of consumers. Debt has taken us about as far as it can.
We have to give up this insane idea that you can systematically starve consumers incomes and expect the consumer economy to thrive on debt.
I believe when the country get more news on the health care debockle there will be an uprising lake never seen before. The senators feel like they are far superior to the voters. They are also the most arrogant bunch of creeps that we should be saddled with the same health insurance as the Illegals while they get their coverage at our expense. " love my country but I fear my government" This should be included in our National Anthem.
I am amazed that you continue to post the sales of homes as a positive thing. The "11%" increase does not honestly reflect the overall market with respect to the rate of foreclosures in the same period. How about being honest and telling your readers about the 19+million empty homes across the country. Or how about telling your readers that the 11 % is less than the foreclosures in the State of California alone. Come on guys, you do a great job so quit playing to the administration by whitewashing the numbers. It's worse than you are reporting and that makes you as much of the problem instead of the solution.
Even though inflation is always anywhere a monetary phenomenon, the US economy has been able to contain its inflartion rating since the present recession(2007-date) simply because, it has always managed its monetary policy very well. This is unlike in Nigeria where inflation rate has been in two digit figure and the spread between lending and borrowing rates has been very wide. The Americans value mass production to reap from economies of scale, hence it has been able to to control its inflationary trend to a digit figure-in most cases, between 1%-1.5%. In Nigeria, despiteefforts to inject liquidity into the financial system, it has been a different story, inflation always rises to a two digit figure. The American central bankers nd western economic managers indeed have knack for controlling inflation and should be commended. In short, what you call inflation i US IS NO INFLATION IN Nigeria. Thank you. Dr SO Uremadu is Nigeria's financial economcs' seer.