Any "Growth" In the Economy Is Unsustainable

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1. Public pressure to withdraw monetary and fiscal stimulus will work and stimulus will be reduced quicker than many anticipate – beginning sometime in early 2010. The Fed has already said it will stop buying mortgages in March and the Obama Administration is now focused on deficit reduction as evidenced by the paltry jobs bill just passed.
2. The fiscally weak state and local governments will therefore receive little aid from the federal government. This will result in budget cuts, tax increases, and layoffs by the end of Q2 2010.
3. At the same time, the inventory cycle’s impact on GDP growth will attenuate. By the second half of 2010, inventories will not add considerably to GDP.
4. Meanwhile, the reduction of Fed support for the mortgage market will reveal weaknesses there. Mortgage rates may increase, decreasing housing demand.
5. Employment will be weak in this environment, leading to another spate of defaults and foreclosures.
6. The foreclosures and weak housing demand will pressure house prices and weaken lender balance sheets, especially because of second-lien exposure. This will in turn reduce credit growth.

Isn’t this exactly what is happening?

1. Monetary and fiscal stimulus is being withdrawn. Do you notice the end of ZIRP? – FT Alphaville
2. The state and local governments are already detracting from GDP growth as of the Q1 figures just reported.
3. The inventory cycle did add to GDP growth in Q1 but was a major factor in the deceleration in GDP growth.
4. The Fed has indeed withdrawn support from the mortgage market. Mortgage rates have been rising, and are near 8-month highs. They fell last week for the first time in five.
5. We know that state and local governments are laying off workers in droves. And Jan Hatzius at Goldman is expecting a fairly weak 175,000 increase in non-farm payrolls when the April Data is released.  That is not going to get it done. Meanwhile, the only thing keeping foreclosure activity from renewed record highs is government intervention.
6. House prices are not rising in the least.  The latest Case-Shiller data showed another decline in house prices. That’s five consecutive months of house price declines.

So, the only thing standing between the US and renewed recession is the over-indebted American consumer. And consumer income is not increasing very much. Consumption is increasing much more.

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