Economy is in the Eye of the Hurricane

Posted by Michael A. Kamperman on December 13, 2009

The readings on the economy are tricking policy makers into thinking the economy has bottomed and a slow recovery is under way.  But this false optimism is based on misreading the tea leaves.  The recent readings on the economy such as GDP, the November unemployment rate, and the November retail sales report are signaling to policy makers that all is calm.  They are misinterpreting this to mean the coast is clear.  In fact the economic reports are flawed and are disguising the second half of the storm that will soon hit in full force driving the economy down in what has come to be known as a double dip.  The growth in third quarter GDP benefited almost exclusively from an auto industry that had practically shut down in the second quarter and got a boost from cash for clunkers.  The November unemployment report was a rogue number not supported by any other measure of the nation’s unemployment rate.  Finally, the growth in retail sales is based on higher gasoline prices and not on an increase in demand for more gallons of gasoline.  Imports of oil in the U.S. have declined by over 1 million barrels versus a year ago.  Ironically the lack of demand for imported oil is considered a sign of economic growth in the GDP report, go figure.  Reality will soon bite hard as the credit collapse enters phase II tomorrow.

 

Dubai is under the gun and will probably allow Dubai World to default on $3.5 billion worth of bonds.  This wake-up call has forced the rating agencies to stop seeing no evil and opening their eyes to the risks of the debt of some countries like Greece.  These countries are not Zimbabwe, nor Iceland, and the problems they are facing are legion throughout the world.  On the Main Street stage the big banks acknowledged they are shrinking their loan portfolios to small businesses and consumers in an attempt to deleverage.  We enter 2010 in worse economic shape than we entered 2009.

 

How will the Obama Administration respond in an election year if the economy heads south?  They have backed themselves into a corner by declaring the recession is over and by declaring every positive signal in the economy as a sign the failed stimulus bill is working.  Does President Obama have the political courage to go back to Congress and say he and his team were wrong and the economy needs a lot more federal spending when he has been out preaching the virtues of deficit reduction ala Hoover in the middle of a depression?  I hope so, but I doubt it.  Instead I look for 2010 to be a year of significant political and social upheaval as rising unemployment frays the fabric of American society.  There are rays of hope.  Paul Krugman has kick-started the conversation about the benefits of the Fed printing money to lower unemployment.  Additionally, Harry Reid has kick-started the conversation on lowering the eligibility age for Medicare.  The genie is out of the bottle on both of these once taboo subjects.  Printing money, lowering the retirement age, and fixing the banks for good are the three keys to ending the depression.  As they say two out of three ain’t bad.