Consumer spending is widely acknowledge as the biggest driver of GDP so in these difficult times one has to wonder where in the heck did all this money go? I’ll hypothesize that money that would have been spent is going to pay down debt. Courtesy of Federal Reserve Economic Data (aka FRED), we can see a rapid reduction of household debt as measured as a percentage of disposable personal income.
|The economy is free… free falling|
July ISM numbers are out (PMI, NMI) and it appears the down trend hasn’t abated. Manufacturing PMI fell rather hard to 50.9 (barely holding the expansion threshold) although the more important non-manufacturing NMI fell only slightly to 52.7. Given the recent GDP downward revision this is actually not horrible but it’s not good either. We can muddle through this for a couple more months but this economy has got to turn around sooner rather than later or we risk the dreaded double dip. Anyway, here are the highlights:
|A sad state of affairs|
I returned from a fantastic two week Middle East vacation on Saturday to discover that there was still no debt ceiling deal. Worst Congress ever. Finally they got it done on Sunday at the cost of $2.4T reduction in the federal budget. Balancing the budget is great in the long run but the budget cuts will only serve to reduce GDP and increase unemployment (June government jobs are -39,000 yoy vs +18,000 total nonfarm) in the short run. We’re intentionally increasing unemployment in a recession. Facepalm.
Combined with dramatically reduced revised Q1 GDP growth, the Federal Reserve will soon have no choice but to continue loosen monetary policy. Recalling that GDP = C + I + G + X, the path forward is pretty clear. C (consumer spending) faces headwinds from increased unemployment and low consumer sentiment, I (commercial investment) is not budging due to C, and G (government spending) is down due to tightening fiscal policy. With CIG moving in the wrong direction, X (net exports) is easiest lever left to pull.
Barring a dramatic turnaround in consumer spending, the only option left is to export our way out of this mess. Probably this comes in the form of QE3 but maybe Bernanke has some other really cool mechanism to devalue the dollar. They can let current policy ride for a few months but action will be required if the economy doesn’t pick up. It’s quite ironic that the Tea Party-led budget cuts will ultimately serve to inflame their hatred of the Fed.