So much for the stimulus based recovery of the last 18 months. Starting in Q3 the fiscal stimulus effect will become negative according to Goldman Sachs:
“For 2011, we have reduced our growth outlook by about 0.9 percentage point on a fourth-quarter to fourth-quarter basis, as noted above. The main reason, as also noted, is the heightened resistance by many members of Congress to extending various fiscal supports to economic activity as they worry about rising risks of longer-term fiscal instability.”
“This resistance was on full display during the latest debate on extending emergency jobless benefits in July. Although the extension eventually passed, this was more than six weeks after the benefits had lapsed in early June. Moreover, the renewal lasts only until November, at which time it seems likely—judging from the current political climate—that any further renewal will require an offset elsewhere in the federal budget. This would reduce the effect on economic activity significantly. Meanwhile, a $26bn package of federal aid to state governments barely cleared the Senate this week, and extension of the tax cuts enacted in 2001 and 2003, which once seemed like a done deal for all but upper-bracket taxpayers, is far from certain less than five months before they are due to expire.
Given these hurdles, we have revised our estimates of the impact of fiscal programs on growth to show more restraint in 2011. (This still assumes that the tax cuts are extended along the lines just indicated.) As seen already in Exhibit 2, we now estimate an average fiscal drag of 1.7 percentage points over the four quarters of next year. While a precise comparison with our previous all-in fiscal assumption is difficult given the various refinements we have made to this calculation, we recently estimated that the increase in fiscal drag for 2011 would be nearly one percentage point for federal programs.”
“Under these circumstances, it is difficult to rationalize the pickup in growth that we previously forecasted for the US economy in early 2011. Beyond the fiscal issues, we see no let-up in three headwinds to private- sector growth:
1. The overhang of unoccupied housing remains near its record high. Until this supply is worked off, it will siphon off a disproportionate share of the net increase in demand for housing, leaving builders with little reason to start new homes. Thus, housing is not providing the cyclical power that it has in past cycles.
2. Employers remain cautious in hiring. Throughout this recovery, we have argued that US firms did not reduce payrolls disproportionately relative to real GDP during the recession, and that they would more likely follow the path of the last two “jobless” recoveries than the more vigorous patterns of earlier cycles. The deeper downturn now reported for real GDP reinforces the first point.
3. Consumers appear unlikely to reduce saving materially. One of the most striking elements of the annual GDP revision was the upward revision to the personal saving rate. The household financial balance (not shown) was also revised up by a comparable amount. Although this suggests that US households have made more progress in adjusting to lower net worth positions, they are probably still wary of reversing course. If that is correct, then the constraints on income implied by cautious hiring, coupled with the likelihood of more price weakness in a housing market saddled with excess supply, suggest that real consumer spending will remain on a sluggish growth path.”
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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