Economic Commentaries

Entries for May 2012


In our Economic Commentary dated May 8, 2011 we warned that budget discipline is a two edged sword. However laudable deficit reduction may be in the long run, the short term fiscal drag effect on the macro economy can not be minimized. This why we have consistently said that there is no easy way out of the fiscal mess in which we find ourselves.

The two edged sword is evident in the most recent GDP report wherein the economy's 2.2% growth rate was held back by a 3% contraction in government outlays. This reflected reduced defense outlays as well as a 6.4% drop in public construction over the past six months. It also shows up in employment where public sector job losses amount to 600K workers over the past year. Outside this country the U.K.'s drive for budget discipline has resulted in a double dip recession. And in the periphery of Europe the drive for budget austerity is resulting in depression like conditions.

So far there is a lot of pain and no gain. Indeed, there is as yet no sign of an improvement in economic circumstances in Europe. And in this country if our forecast of 1.5% to 2% GDP growth for the remainder of this year is realized, employment growth will slow, household and business angst will rise, the budget deficit will worsen, and the nation's debt ceiling will be exceeded. Is there any good news in all this bad news? In the short rum economic lethargy and over-production is beginning to weigh on commodity prices and inflation. Weakening energy and food prices will relieve some of the downward pressure on disposable that is being wrought by the continued absence of wage growth. This will hopefully enable households to rebuild depleted savings without inordinate pain. Additionally there is increasing attention to Bernanke's fiscal cliff and our fiscal train wreck such that perhaps Washington's nitwits may be forced to address the issue sooner rather than later.

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