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What recovery?

Much has been said about the economic recovery by the White House after the GDP grew by 3.5% despite rising unemployment and the fact the housing market is still in shambles.

The Mortgage Bankers Association’s index of applications to buy a house dropped 12 percent in the week ended Nov. 6 to 220.9, the lowest level since Dec. 2000. The group’s refinancing gauge rose 11 percent as interest rates decreased, pushing the overall index up 3.2 percent.

The drop in buying plans points to the risk that the recent stabilization in housing will unravel without government help. In a bid to sustain the recovery, Congress passed and the administration signed a bill last week to extend jobless benefits and incentives for first-time homebuyers, adding a provision that also made funds available to current owners.

Well that’s the problem with voodoo economics. When the government inflates a bubble the bubble will collapse without the government constantly funneling money into it. The Cash for Clunkers program was a prime example of this. From Forbes.com:

Growth was driven by consumption, exports, federal government spending, home building and inventories. Consumption contributed 2.4% of the growth, with a particular boost in autos. Thanks to the Cash for Clunkers program, motor vehicle output added 1.66 percentage points to GDP. But even without this particular stimulus program, consumption improved and the economy grew nearly 2%, a swift turnaround from the first quarter of 2009 when the economy was shrinking at a 6.4% rate.

Yeah, that’s nice. Except each car traded in cost taxpayers $24,000. So all you did was take from the deficit and add to the GDP.

The claim about exports is contradicted by an earlier Bloomberg article:

Oct. 9 (Bloomberg) — The U.S. trade deficit probably widened in August for a third consecutive month as imports and exports increased, pointing to a rebound in global growth, economists said before a report today.

The gap grew to $33 billion, the widest since January, from $32 billion in the prior month, according to the median forecast of 76 economists surveyed by Bloomberg News. The deficit widened as U.S. appetite for foreign goods outstripped demand for American-made goods abroad.

What about consumption? Did that really account for the remainder of the growth? Yes and No. Construction plays a huge role in any economy from a consumption of raw materials standpoint. It affects everything from the lumber industry to the paint industry to outlet stores. The job market is largely dependent upon it as well. According to the September numbers private construction was down 20.6% from a year ago and the only private sector gains were in power and manufacturing. Private sector residential spending was down 27% which seems to throw a monkey wrench into the idea that this is a sustained recovery.

However, there were gains in the public (government spending) sector. Public residential spending was up 5.6% and total spending was up to $326.4 billion. This artificially inflates the “G” variable in calculating the GDP (C=consumption; I=Investment; G=Government spending; E=Net exports; C+I+E+G=GDP). More fake voodoo economics.

With the horrible job market, GDP inflating incentives (voodoo dolls), and the weakening dollar what reason do I have to believe the economy is really improving? None that’s what. Rocky Vega says it all.

1. The money lost on stimulus spending – The 3.5 percent growth in GDP is roughly equal to an additional $112 billion dollars in output quarter-over-quarter, but we spent $173 billion on stimulus over that same period. Basically, GDP gained about 65 cents for every dollar spent on stimulus, not exactly a win.

2. The weak job market – In October the total number of people filing for some kind of unemployment rose to over 10 million for the first time in history, and no new jobs are replacing the ones that are lost.

3. Consumption is only up because of incentives – Cash for Clunkers, tax credits on energy-efficient goods, and other programs have only temporarily goosed shopping. US consumer spending has already fallen again in September… for the first time in five months and by the largest amount in nine.

4. Housing tax credits – The National Association of Realtors says nearly half of the increase in home sales this year was due to tax credit. Unfortunately, the credit cost about $30 billion to execute and only generated about $11.6 billion in tax revenue. Roughly speaking, about three dollars were spent for every dollar brought in.

5. The weak dollar – Two notable problems here. First, foreign countries have been able to cheaply borrow the weak dollar in order to finance useful capital projects in places far away from the US. Second, the Chinese yuan’s dollar peg causes it to weaken when the dollar does. This means that China keeps its cost advantages and the US fails to see increased exports.

With with the fact that people aren’t buying homes and younger families are choosing to rent instead of buy, I think we’ll see a stagnant growth rate for the near future. The holiday season will provide a temporary boost as conveyor belts fire up to replenish depleted inventories, but watch for the market corrections in late January.

Categories: Economy
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