Monday, November 2, 2009

Point of Clarification

To be crystal clear on where I stand:

1) My primary concern is -- and always has been -- about the "handoff" or sustainability of growth. I think we can all agree that the government can't -- and shouldn't -- prop up the economy indefinitely. I get all the Keynesian stuff, but the government "bridge," such as it is, has to let you off on the other side at some point. My visibility as to where that might be is still extremely hazy.

2) I was for the stimulus package. In fact, I was for a bigger stimulus package. And while I'm not bemoaning -- only pointing out -- that last week's 3.5 print was largely government subsidized, I always seem to be left wondering, "Where do we go from here?" What is going to be the driver, the growth catalyst, to get GDP back up the sustainable trend (~3.0 or so) we require to get to fuller employment and see some wage growth? This is something that could have been -- should have been -- under discussion six months ago and is, as best I can see, still not.

3) My concern about sustainability is focused on the consumer. To that end, the following appeared in a piece of Merrill Lynch research last week:

What will sustain the recovery?
Take a look at page A2 of today's Wall Street Journal, "Consumers Unlikely to Keep Pace". Here is what the Journal says: "Consumers helped propel the U.S.'s economic growth in the third quarter, but unemployment and tight credit are hampering their ability to lead a sustainable recovery - and it isn't clear what part of the economy can replace them." We would just point out that a 3.0%+ run-rate on consumer spending is not the deciding element in our forecast for a sustainable recovery. This is going to be a recovery driven by exports, inventory de-stocking, and business investment, in our view.

Now, the three items the Merrill team cites may, in fact, produce a "recovery." But now we're getting into semantics, because what those three factors can reasonably produce, over time and absent robust consumer participation, will be nothing more than the most muted, jobless recovery our country has ever seen.

I know Bonddad wasn't pointing a finger at me. We speak almost daily and we know exactly where each other stands (and I think we're generally in complete agreement). It's not my intention to be a downer, but I think we need to be realistic about what's ahead and how we're going to address it. The government simply cannot carry the ball forever, on that I think we'd all agree. In a nutshell, we need to figure out how we're going to put people back to work.

(I see Paul Krugman has a post up at his blog that speaks to the points I'm trying to make. It addresses what recovery "should" look like, and cites another post that's spot-on.)