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Friday, October 30, 2009

What Now?

My latest four posts:

Can be summarized as we had a HUGE downturn and the recent upturn was due in large part to:
  1. Massive stimulus (think autos / housing)
  2. Inventory restocking (details of the coming "mother of all corrections" from July here)

Now, lets take a look at the historical data showing the importance of each to Q3's recovery.

Q3 GDP Breakdown (Contribution of Each)

Unless you think autos, housing, or an inventory rebuild can be sustainable areas for future growth, the importance of the chart above is the green "other". The "other" accounted for the last of the pre-recession growth as the housing market stumbled and while we have seen a recovery (i.e. the "other" is no longer a drag), it accounted for a minuscule amount of growth in the latest quarter.

The million dollar question is 'can the economy grow on its own in coming quarters?'. While the stimulus (homeowner tax credit) and inventory restocking (which I suspect will only get bigger) should allow the economy to grow well through this year, the impact of both will likely be reduced going into Q1 of next year.

My guess is that all the taxpayer money that was (wasted?) used to pull demand into Q3 from future quarters, was done so with the hope of kick-starting the consumer in a manner that used to be done through Fed interest rate cuts. That worked in the past when consumers needed a nudge, but what if the answer is not for the US consumer to power the world's growth, but to rebuild and invest (i.e. save) for the future.

Source: BEA