Frank Ahrens

Government-fueled recovery not sustainable

Let's say you've got three choices for how the economy's going to fare in the second half of 2010 and into 2011. They are:

A) A double-dip recession.

B) A slowdown in the ongoing recovery.

C) A sustained recovery.

If you want to turn a blind eye to the raft of economic data that came out last week, then by all means, pick Option C. But if you've paid attention and tried to digest the data on housing, unemployment, consumer behavior, stock market activity and overseas turmoil, you'd have to lean toward Option B. And an increasing number of people are starting to warily eyeball Option A.

Let's recap what we learned about the U.S. and global economy over the past week and try to figure out where we stand, now that we're halfway through 2010:

On Friday, we learned that the U.S. unemployment rate for June dropped to 9.5 percent from 9.7 percent in May — but don't fixate on that. Here's the Friday number you need to focus on: 83,000. That's the figure for jobs created last month in the private sector, i.e., not created by government money. It's below the number of private sector jobs that need to be created each month — 125,000 — just to keep up with population growth. The Great Recession probably ended a year ago, but private sector employers, still worried about the near future, largely refuse to hire.

Thursday brought this stunner: Sales of existing homes in May dropped 30 percent from April, more than twice what everyone expected. Reason? Remember that $6,500 to $8,000 home-buyer tax credit that the government was handing out? It expired April 30. The message is clear: The tepid housing recovery we've seen over the past year was supported by government hand-outs, not market demand.

On Wednesday, stocks ended their worst quarter in more than a year. By week's end, it only got worse. It is now clear that the stock rally, which began at the March 2009 bottom, ended in late April of this year as investors left the market for the relative security of U.S. Treasury bonds and other safe harbors.

On Tuesday, we learned that consumer confidence in May fell off the table, dropping nearly 20 percent compared with April.

On Monday, consumers telegraphed their lack of confidence in spending numbers released by the government. Consumer spending in the United States remains weak: It is increasing at half the rate it did in the months following the recession of the early 1980s, the second worst downturn of modern times.

What does all of this tell us?

I started with Peter Boockvar, equity strategist at Miller Tabak.

My e-mail was short: "Double-dip or slowdown?"

His response was equally abrupt: "Depends on who wins Nov. elections and what taxes get hiked in 2011."

The tax cuts enacted by President George W. Bush expire at the end of this year. President Barack Obama has proposed extending those cuts — except for families that make more than $250,000 a year. If Republicans win Congress in November, it's a good bet that the wealthiest Americans will keep their tax cuts. If the Democrats hold the Hill, it's unlikely.

"Our fragile economy CANNOT handle any tax hikes whatsoever, particularly on capital and the income of those who invest, save and spend the most," Boockvar wrote, meaning those American families that make more than $250,000 a year. The all-caps are his, but the feeling is shared by many.

I followed up with Boockvar, and e-mailed: "You notice one of my choices was not 'sustained recovery.' "

He wrote back: "Sustained certainly a ways off."

There are those who believe that what we're going through right now is a natural pause in recovery, of the sort we've seen before. In an interview with CNBC, former Federal Reserve Chairman Alan Greenspan said as much. But Mizuho Securities USA chief economist Steven Ricchiuto sees "an economy losing momentum at a fairly rapid pace."

"Let's face it," wrote Bernard Baumohl, chief global economist at the Economic Outlook Group. "This has not been a good week for economists who believe the U.S. economy is on the rebound and that the fundamentals of the recovery are getting stronger."

Finally, there are those arguing that we need an Option D for what's ahead, as in D for Depression. New York Times columnist Paul Krugman has predicted such a thing, saying we're in for a long period of high unemployment and deflationary contraction, with wages falling and businesses failing.

Disclosure: Paul Krugman has a Nobel Prize in economics and I, um, don't. But when you read Krugman on economics, you need to read him through a filter. You can correctly read many of his columns as arguments for more taxpayer-funded stimulus. So just know that.

We have been in recovery for more than a year — wobbly, furtive and paper-thin as it is. But the bam-bam-bam of last week's data boldly illustrate something we've really known for months now: This recovery has been fueled by government money. And eventually that runs out.

© 2010 Washington Post

Government-fueled recovery not sustainable 07/05/10 [Last modified: Monday, July 5, 2010 6:24pm]

Copyright: For copyright information, please check with the distributor of this item, Washington Post.
    

Join the discussion: Click to view comments, add yours

Loading...