Economic growth will remain moderate, only to slow or worse once stimulus ends

It would be a mistake to assume that the economy's recessionary problems are behind it and that the recovery will continue to gain traction indefinitely. The various forms of economic stimulus are clearly having a positive impact on the recovery. But, the tax cuts and other forms of stimulus are likely to end this year. At the same time, economic and financial negatives will continue to prevail, if not intensify. That suggests the economic recovery will at best continue to grow at only a moderate pace that keeps unemployment high for an extended period. But, once the economic stimulus fades from the scene, the economy will either slow or slip back into recession.

There are many depressants still plauging the econom. The deleveraging process is far from complete for individuals, business, financial firms and governments. It will take years more to complete the reversal of the extreme and monumental buildup to overdependence on debt of all these sectors.


The housing sector is still in retreat. There is a huge overhang of unsold homes, vacant homes and homes under water (with outstanding mortgages in excess of market value). There is a coming further wave of foreclosures as financial institutions deal with a backlog of delinquent mortgages and paperwork logjam problems. This all points to a further significant decline in home prices. Even the prices of apartments in urban centers are continuing to decline further. And housing is a long-lead economic leading indicator.

The bad loans that financial institutions still have on their books remain a serious potential threat to their capial adequacy. The revision of Federal Accounting Standards Board rules allows financial institutions to postpone writing off distressed assets as long as they indicate no intention of selling them. That avoids the write down of capital that previous rules would have required. But, it does not make the instutions whole or encourage lending. It plauges them with much the same problems that have beset the beleagured Japanese banks and that have been instrumental in keeping Japan in its economic morass for well over a decade.

The state and local governments have to deal with their huge budget deficits by cutting spending and staff. That is a major negative for the US economy.

China is attempting to curtail its speculative binge. It cannot depend on the US consumer to the same extent to fuel its export dependent economy. The European debt crisis will force austerity on some nations and a slowdown on others. There is a move toward protectionism that will slow global growth. Japan's earthquake related problems will slow its growth and transmit weakness elsewhere due to shortages, despite the eventual rebuilding boost effect. The MiddleEast unrest creates global economic uncertainty and high oil prices that will dampen US and global consumer discretionary spending.

This litany of economic negatives adds up to only a temporary and feeble cyclical economic recovery.

There are certainly some moderate economic positives in the current economic picture. The March increase in nonfarm payrolls was 216,000, in line with expectations. And the official unemployment rate edged down to 8.8% from 8.9% in February. But,that is still a very slow pace of employment growth and an exceptionally high rate of official unemployment this far into a cyclical economic recovery. To make matters worse, the U-6 unemployment rate is still 15.7% seasonally adjusted. This series, which includes discouraged workers who can not find work and those employed part-time because they could not find full-time work, is a better measure of the real extent of the nation's employment distress. Moreover, a disproportionately large share of the employment gains were in low paying jobs. That helps explain why average hourly earnings and average weekly earnings were unchanged. Durable goods orders were weak in the latest report. That is a surpise considering the US effort to boost capital expenditures by allowing substantially increased tax expensing opportunities this year.

Taken together, these views and problems suggest that inflation wil not accelerate on a sustained basis, despite the recent rise in food and energy prices. The Fed will continue its accomodative policy for an extended period, through this year and into next, even if it ends the QE2 purchases of Treasuries at midyear. Treasury bond yields will eventually decline significantly, especially when the commodity price bubble bursts and the US and global economy slows. High-grade bonds will also benefit. But junk bonds will suffer. The stock market will also be declining at that point. But until there is at least a 4.0% decline in the major equity market indices in any given week, it is cautiously prudent to remain invested.

Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731


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