by John M. Curtis
(310) 204-8700

Copyright Aug 2, 2009
All Rights Reserved.

         Gross Domestic Product rebounded from a whopping negative 5.4% and 6.4% for the first two quarters of 2009 to only wind up a minus 1% for the Q-3.  That increase in growth of 4.4% and 5.4% from the first quarter has many market watchers and economists wondering whether Q-3 will spell the end of the worst recession since WW II.  With economic growth, the figures are all relative, measuring change in absolute value or, put another way, improvements along a negative or positive economic continuum.  Improvements in growth appear attributable, in part, to President Barack Obama’s $790 billion economic stimulus plan, designed to offset a painful economic contraction and heavy job losses.  Recent jobs’ figures support the idea that the pace of layoffs has slowed, though no one knows for sure whether improvements will cause a jobless recovery.

            Federal Reserve Board Chairman Ben S. Bernanke held the federal funds rate steady at 0-.25%, signaling that, despite positive trends, the economy remains in recession.  Beranke and other Fed watchers know that there can be no real economic recovery until consumers, accounting for 70% of GDP, return to the marketplace.  Consumer spending dropped 1.2% in Q-3, far outpaced by a 10.9% jump in government spending, a disturbing trend also linked to the president’s economic recovery plan.  Only by steady increases in consumer spending can real GDP expect to rise.  With unemployment still rising, Beranke knows there’s no end in sight to the current recession.  Even if Q-4 turns positive, it won’t signal a return of consumer spending until unemployment improves and consumers have enough credit to finance new purchases, especially big-ticket items.

            During the vaunted Clinton years, especially between 1996-2000, the asset bubble was in the stock market, especially the tech-rich Nasdaq that witnessed an unprecedented boom.  Raking in record capital gains, the U.S. and state treasuries witnessed unexpected surpluses, accounting for balanced budgets and positive cash-flows.  Since the bottom hit in March, the stock market has rebounded 40%, showing no signs, despite ongoing predictions by market bears, of reversing itself.  Stock market rallies have lead to past economic recoveries but eventually consumers spending must kick-in.  Economists haven’t figured out what to do about today’s tight credit markets where consumers homeowners can no longer fuel GDP growth.  Lending practices are currently so strict that it’s difficult for even qualified borrowers to the get the credit needed to spur consumer spending.

            Rising concerns about mushrooming budget deficits also weigh against economic growth.  Obama’s health care reform act could wind up adding another $200 billion on to an already bloated $2 trillion deficit.  Several economic powers, especially Russia and China, have complained about the devalued U.S. dollar remaining the world’s reserve currency.  Mindful of the dangerous effects of rising budget deficits, Obama has tried to sell health care reform as the best path to adding more economic stimulus.  Like Supply-Side theory that boasts stimulus from tax cuts, Obama’s health care overhaul provides more stimulus from lowered premium costs.  Lowering health care costs hands consumers, like tax cuts, an added stimulus to pump more cash into the economy.  Giving consumers more discretionary cash should, like lowered pump prices, spur more  consumer spending.

            Changes in GDP, while encouraging, don’t automatically translate into economic recovery.  Economists haven’t yet figured out how to re-capitalize businesses without inflating the stock market.  Tougher consumer and real estate lending regulations have crippled borrowers’ ability to reenergize the economy.  While it’s OK to tighten lending standards, the downside involves reduced consumer spending.  Spending only cash at hand won’t fuel the kind of spending in big-ticket consumers goods, especially autos and major appliances, needed to boost GDP.  “We won’t have a recovery as long as we’re  losing jobs, [but] you need to have economic growth before you have job growth,” said Barack, worried that without robust consumer spending today’s positive GDP trends will fizzle out.  If the stock market continues to rise, publicly traded businesses will have enough cash to rehire workers.

            Today’s economic recovery is a complicate picture involving a rising stock market to fuel the capital requirements of publicly traded companies.  Even if consumer spending lags, a rising stock market could help provide the cash infusions necessary for rehiring workers.  When workers go back to work, they’re more inclined to spend a portion of their paycheck on consumer purchases.  Today’s excessive savings rate, attesting to consumers’ fear, should change once reemployment and job stability return to the market.  Barack’s health care reform, if it lowers premiums for businesses and individuals, should also provide more economic stimulus to fuel GDP.  Retooling consumer and real estate lending practices should also help assure that consumers have the needed funds to spur economic growth.  Stock markets alone can only go so far before consumers must take over.

 John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.