Saturday, July 24, 2010

>The Artificial Economic Recovery

Economic recovery in the U.S. and elsewhere has slowed rapidly and private and some
public forecasts are being downgraded accordingly. The Federal Reserve is sounding much
more cautious, although they are not yet prepared to talk of further monetary easing. The most
optimistic observers are now having to face reality. The massive stimulus packages did the job
of stopping a self-feeding downward spiral but they have given us an artificial recovery.

Growth is now gravitating back towards 1% in the U.S. and Europe, close to what final
demand has been. In the U.S. the inventory cycle has stopped adding growth, state and local
governments are slashing expenditures and jobs, the nascent housing recovery has gone into
reverse, and deleveraging continues. Realistically, it is difficult to picture where any new growth
surge may come from.

One of the most important implications of this dampened outlook is that government tax
revenues will be disappointing and expenditures will remain elevated. The cyclical component
of the deficit will remain high and the structural component will be hard to cut in a weak
economic environment with unemployment likely to rise further.

To read the full report: ARTIFICIAL RECOVERY