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Economy Remains on Life Support - Weekly Review

This has been a whirlwind week for intangible monetary policy news which was lead by:

  • The Federal Reserve Press Conference (see first article under author's picture) by Chairman Bernanke which contained almost no new economic insights; and,
  • An FOMC meeting with no policy changes or insights.

My foggy long range economic view is of a moderately improving economy which is fighting growing fiscal headwinds. My takeaway from from the press conference and FOMC meeting was a fairly strong opinion by Chairman Bernanke that the economy was gaining enough traction to stand on its own without further accommodation.

A deeper look at advance 1Q2011 GDP real growth of 1.8% should quickly dispel this.

The economy is still in recession if the economic effects of the automatic stabilizers are taken into consideration. Automatic stabilizers are automatic changes in the government's revenues and outlays that are attributable to cyclical movements in real output.

A caveat when interpreting the chart below is that no study has determined what portion of automatic stabilizers actually get into GDP - GDP measures only 1/3 of the economic money flows. But understanding the size of automatic stabilizers in comparison to GDP are indicative of current economic duress.

Autostabilizers

A better measure of economic health is comparing the fiscal boost being given to the economy due to the American Recovery and Reinvestment Act (aka "the stimulus").

Stimulus Impact

The orange range in the above graph is the estimated range of effects on GDP of the stimulus. My take from this graph is that it is likely the economy was negative in 1Q2011 without stimulus.

Some of the automatic stabilizers were funded within the stimulus - and looking at GDP is a rear view mirror of the economy. What is important is where the economy is headed.

And this leads me to the nail in the coffin - government spending. In Chairman Bernanke's press conference, he stated that there were no government deficit reduction bills or programs which would derail his positive (but downwardly revised) economic projections. See first article under author's photo.

Before any of these deficit reductions begin effecting the economy, we have the government putting a 1% headwind on GDP in 1Q2011 - the largest government spending headwind since the end of World War II.

The economy is much weaker than picture Chairman Bernanke painted, and it is likely he crossed his fingers when saying further extraordinary monetary policy accommodation would not be necessary.

Economic News this Week:

Econintersect issued its economic forecast for April 2011 (see second article under author's photo) indicating a peaking of this current economic sub-cycle. In simple words, the same moderate recovery seen in March will continue in April.

This week the Weekly Leading Index (WLI) from ECRI declined slightly from 7.7% to 7.5%. This level implies the business conditions six months from now will be approximately the same or slightly improved compared to today.

Initial unemployment claims increased moderately in this week's release. The data for the last two months as been quite noisy, and it remains important to follow the four week moving average for analysis of unemployment to smooth out the reporting idiosyncrasies. Although the trend over the last six months has been down, we are in a short term uptrend - please refer to "Initial Unemployment Claims Rise – A Harbinger of Poor April Jobs Outlook," third article onder the author's photo.

The data released this week were consistent with a moderately improving economy. Housing data was as expected – not good – but this economic cycle is operating with poor housing dynamics which continues to degrade slightly. There are some indications of light at the end of the tunnel.

Bankruptcy this Week: Peregrine

The following table with active links can be seen here.

Weekly Table 29 April 2011

Failed Banks this Week:

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Economy