Historically, stock markets climb ahead of an economic recovery and, applying that logic, the recent climb in the various stock market indices should point towards a recovery in the US economy in the not too distant future. However, hope can trick us into seeing things that are not there – like a mirage of an oasis in the desert.
Remember, all stock markets are pretty much like casinos – calculate your odds, place your bets and hope that you will come out a winner. Investment experts and stock analysts who will tell you anything you want to hear – we get to watch them pitch their thoughts daily on CNBC or Fox Business News – take everything they say with a good pinch of salt. They are masters of using obscure language that could be interpreted to mean different things to different people at different times. If they were such ‘experts’ how did they all (with possibly a few exception) fail to forewarn investors of the near collapse of the financial industry?
Unless the authorities come up with the right solutions, an economic recovery from this downturn will be painful and long, like trying to climb up a greasy pole.
Continuing trends that hamper recovery or indicate that all is not well:
- Oil prices have crept above the $70 mark – we’re halfway back to the peak reached in July 2008, more than double the lows in the mid-$30’s that it hit in December 2008 and again in March of 2009. Consequently, average regular grade gasoline prices nationwide have climbed from under $1.60 a gallon in December 2008 to over $2.60 in June 2009 – that is a 62% increase – while the recession is still deepening. Speculative investors in oil are back and that is bad for recovery.
- Unemployment has continued to climb although the pace appears to show signs of slowing. It will take a solid few months after the trend reverses for consumers to even begin to regain confidence enough to spend on things other than necessities.
- Despite the all-time low interest rates, credit is still tight and consumer patterns are changing as they veer towards a higher rate of savings (if they still have a job) from the glory days of spending what they did not possess or have not earned.
- State, local and regional governments are scrambling to compensate for shortfall in tax revenues by cutting services or increasing tax rates, both of which will hurt the average consumers even more, driving them to spend even less on non-essentials and sometimes cutting into even the essentials.
- Dysfunctional state governments such as those in California and New York (numbers 1 and 3 in terms of the size of their GDP in relation to the overall GDP of the US) will further hamper the speed of recovery as necessary budgets and laws are not passed.
- Five months after its passage in Congress, only a small fraction of the money from the $789 billion stimulus package has hit the ground and promised spending on infrastructure will take a while yet to come on-stream to have any visible impact on the unemployment numbers. As of July 16, only $183 billion has been allocated to state agencies and, of that, only $63 billion has been spent (source: Recovery.gov) - less than 10% of the total stimulus passed.
- To make matters worse, some states will not be getting the stimulus money as Republican governors in those states have rejected the stimulus funds (source: Fox News. com).
- The TARP money that was used for bailing out the failing financial institutions and automotive giants only helped to stabilize the system but will not generate new jobs, income or consumer spending.
The administration has done well to stabilize the situation but it must quickly move towards actions that will stimulate the economy in the right way. Interestingly, a guest on CNBC on the morning of July 7 highlighted the way the Chinese government has succeeded in stimulating its economy and they way they have done it reminded me of the idea I posted on my blog back in December 2008 titled “To B or Not to B”.
The US needs to stimulate consumption but giving away money, whether directly or via tax breaks, is not going to do the trick in the current environment. A more cautious population will simply stash the money away in fear of a deeper and longer recession. Time to focus on ideas and actions that will pull us out of this hole.
