GDP Report Shows Little Reason for Optimism

Posted by Michael A. Kamperman on May 2, 2010

I am a very optimistic person.  It pains me to be such a pessimist on the economy.  I look forward to the moment when I can switch from pessimism to optimism.  Now is not that time.  The preliminary GDP report showed growth of 3.2%.  This represents a significant slowdown from the 5.6% growth rate reported in the fourth quarter of 2009.  This is the roaring recovery we keep hearing about.  The so-called jobless recovery.  But the key to remember is this is the best we could do despite the $787 billion stimulus plan, the quantitative easing from the Fed, the home-buyers tax credit, and the stimulus spending from many foreign nations.  It looks like rough sledding ahead.  The Fed stopped adding cash to the economy at the end of the first quarter.  The homebuyers tax credits expired at the end of April.  Considering that almost 45% of all home-buyers in March were first time home-buyers, triple the normal rate, it is reasonable to assume another slowdown in home sales started yesterday.  Jarringly state and local government spending dropped at an annualized rate of 3.8% in the first quarter.  Most of the money from the stimulus plan was aimed at providing cash aid to state and local governments.  What will happen to state and local government spending when the stimulus money stops coming at the end of 2010 since their budgets are already plummeting now?  Export growth slowed in the first quarter.  Not surprisingly the dollar has continued to strengthen all year hindering relative export competitiveness.  And of course we are all watching the Greek Tragi/Comedy unfold day by day.  Greece has forced all of Europe and many other debtor nations to tighten their belts in the last few weeks.  It is impossible to see how exports can lead a U.S. recovery going forward no matter what the rhetoric is from the Whitehouse. 

I was at a party last night and I mentioned that Gallup reported the March unemployment/underemployment rate was 20.3% and that in Spain the official unemployment rate is now 20%.  A man I met who works in the aerospace industry said unemployment in his industry is 30%.  He said he has so many friends living off of their IRA’s and 401(k)’s and that for some the money is starting to run out.  A woman I met told me about her daughter in her 30′s having to move back home.  The economic pain is spreading and it is not letting up.

The economy definitely needs another major stimulus plan.  That looks politically impossible in 2010.  The Tea Party movement believes our problems are the result of too much government spending.  Their libertarian leanings are pulling the Republican party to the right.  The progressive liberal wing of the Democratic party is all that will be left after the 2010 elections.  Those politicians who believe in the possible, which means they believe in the art of compromise, are an endangered species.  We could well be in a period in 2011 and 2012 when nothing significant is accomplished because compromise by either side will be viewed as surrender by the radicals that increasing are gaining power on both sides of the aisle.  The old saying that there is not a dimes worth of difference between the Republicans and the Democrats may well no longer be true.  Polarized politics will not solve America’s problems.  We need the President and both aisles of Congress to focus on creating jobs for others rather than focusing on saving their own jobs for themselves.