Saturday, April 02, 2011

Second dip of the economy coming soon

Gee. The newscasters are touting the improved unemployment figures and claiming that the Great Recession is over. Economic happy talk fills the media again. Want to know why? They all desperately want you to buy whatever they are selling and you won't if you have guessed that the economy will shortly turn around and head down again.

Which it will. Very soon, in fact. Why? Robert Reich lays out the situation.
Consumers are 70 percent of the American economy, and consumer confidence is plummeting. It's weaker today on average than at the lowest point of the Great Recession.

The Reuters/University of Michigan survey shows a 10 point decline in March -- the tenth largest drop on record. Part of that drop is attributable to rising fuel and food prices. A separate Conference Board's index of consumer confidence, just released, shows consumer confidence at a five-month low -- and a large part is due to expectations of fewer jobs and lower wages in the months ahead.


...isn't the economy growing again -- by an estimated 2.5 to 2.9 percent this year? Yes, but that's even less than peanuts. The deeper the economic hole, the faster the growth needed to get back on track. By this point in the so-called recovery we'd expect growth of 4 to 6 percent.

Consider that back in 1934, when it was emerging from the deepest hole of the Great Depression, the economy grew 7.7 percent. The next year it grew over 8 percent. In 1936 it grew a whopping 14.1 percent.

Add two other ominous signs: Real hourly wages continue to fall, and housing prices continue to drop. Hourly wages are falling because with unemployment so high, most people have no bargaining power and will take whatever they can get. Housing is dropping because of the ever-larger number of homes people have walked away from because they can't pay their mortgages. But because homes the biggest asset most Americans own, as home prices drop most Americans feel even poorer.

There's no possibility government will make up for the coming shortfall in consumer spending. To the contrary, government is worsening the situation. State and local governments are slashing their budgets by roughly $110 billion this year. The federal stimulus is ending, and the federal government will end up cutting some $30 billion from this year's budget.
So what about the reported improvement in the economy?
Wall Street is buoyant -- and most financial news you hear comes from the Street. Wall Street profits soared to $426.5 billion last quarter, according to the Commerce Department. (That gain more than offset a drop in the profits of non-financial domestic companies.) Anyone who believes the Dodd-Frank financial reform bill put a stop to the Street's creativity hasn't been watching.

To the extent non-financial companies are doing well, they're making most of their money abroad. Since 1992, for example, G.E.'s offshore profits have risen $92 billion, from $15 billion (which is one reason it pays no U.S. taxes). In fact, the only group that's optimistic about the future are CEOs of big American companies. The Business Roundtable's economic outlook index, which surveys 142 CEOs, is now at its highest point since it began in 2002.
So this is the story. The economy is too weak to continue to improve, state and local governments are right now in the process of laying off thousands of people and consumers are feeling too threatened to spend anything.

Then the stated improvement in the economy is largely by big firms that are operating outside the U.S. where profits are possible.

The top 1000 American firms have had $2 trillion in cash on their books since early 2008 and they haven't spent it. They see what Bob Reich sees, and they do not see any reason to think that the consumers (who make up 70% of the American economy) are going to increase spending. The fact is that with the second downturn, spending will drop even more. There is no profit for a large company to make by investing right now. (The exceptions are miniscule and can change nothing.)

T%he only thing that could keep the economy out of the second dip of a double-dip recession would be increased government spending (there's no other source) and our idiots in Washington, D.C are currently fighting to see how much they can cut out of the government budget.

So don't buy a new house or new car right now. Do not borrow to buy any big ticket items unless bankruptcy is an option when your income disappears. Don't put your savings all in one place. Make your plans based on a second major decline in the economy occurring soon.

Because it is coming.

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