Insights & Advice

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A Stop and Start Economy

Recently, worries have surfaced over the sustainability of economic growth in this country. Over the last several months the data has been pretty good. Now the numbers indicate the economy is faltering—again.

Which way the economy?

I say again because the same thing happened last year at around the same time. Economists call that a stop and start economy, something we haven’t seen since 1967. The mild winter and warmer early spring in two-thirds of the country this year has also added some confusion to the economic picture. Confusion in terms of how much of the strength in America’s fourth quarter of 2011 and into the first quarter of 2012 was due to abnormally mild weather?

On the surface everything was looking just ducky at the start of this year. The manufacturing cycle seemed to be catching fire. There appeared to be pent-up demand, coupled with massive liquidity injections by our Federal Reserve (QE 2.5) and the European Central Bank’s money giveaway as part of their bail out of Europe’s financial system. As a result, economic activity exploded at the end of last year (as did the stock market).

And then came the Ides of March.

Most of the manufacturing data for March indicates a less sanguine portrait of America’s economic health.  Industrial reports ranging from the Chicago Fed’s national activity Index, The ISM Composite Index, and the Richmond, Dallas and Kansas  Manufacturing indexes released monthly by the Federal Reserve all say the same thing.  The economy is slowing for the second time in 12 months.

 Just recently the Economic Output Composite Index marked its first decline in March since August, 2011 and this week’s National Federation of Independent Business (NFIB) Index confirmed that March was a real stinker.   The NFIB Index is important because it gives us a better view of what is going among small businesses, which are the backbone of our country. Over the last 6 months, the NFIB Index has grown steadily, like the rest of the economic data. But In March, nine of the NFIB’s 10 index components hit the wall, declining markedly with the largest drops in hiring plans and expected real sales growth.

The gloomy prognosis for sales and hiring is especially important because small businesses hire the majority of workers in America. They are also completely dependent upon the consumer. Between fuel savings from the mild winter and lower gas prices at the pump last summer, those windfall savings generated $30 billion for American consumers. That was money they could and obviously did spend on other things. Now that the weather cycle has returned to more normal temperatures the impact of those economic “tax credits” have dissipated.

The stop and start performance of the economy should come as no surprise to readers. After all, it is something we have been living with since the end of the recession back in 2009. Back then, In order to “jump start” the economy, the Federal government, along with our Federal Reserve, has thrown money at the problem again and again. The resultant record deficits we now endure have put an end to the government’s giveaway programs but not those of our central bank.

 We have printed and then poured trillions upon trillions of dollars into the economy. After each spending splurge, we have seen a rise in economic activity but as the next round of quantitative easing ran its course, that activity began to sputter once again. This bout of stimulus is scheduled to end in June. Last year we witnessed a similar phenomenon at the end of QE II.

The government and the Fed have hoped that at some point once enough money is in the system that “organic” (real) economic activity will pick up where their stimulus left off. So far that has not been the case. Given that it an election year, I doubt that the Fed or the government will allow the unemployment rate to rise or the economy to slow once again. If the numbers continue to decline we can expect yet another round of stimulus, regardless of its impact.

Bottom line: What do you call someone who does the same thing over and over again and still expects a different outcome?

 

 

 

Posted in A Few Dollars More, Macroeconomics