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$1.3 Trillion, For What?

May 5, 2009
Bernanke in Congress
Image by talkradionews via Flickr

Federal Reserve Chairman Ben Bernanke went before Congress’ Joint Economic Committee today and indicated he is cautiously optimistic that the economy will begin to recover before year’s end.  He said, “We continue to expect economic activity to bottom out, then to turn up later this year.”  This positive outlook is predicated upon further stabilization of the banking system.

This testimony was subsequent to the release of a generally positive statement yesterday by National Association of Manufacturers that likewise was generally encouraging.  Wrote Dave Huether, NAM Chief Economist,

Reports last week showed that while the economy remained in a deep recession through the first quarter of the year, signs of improvement are continuing to emerge. Eight of the nine major economic indicators that came out last week showed improvement.

The major report last week was the Commerce Department’s advanced estimate of GDP growth in the first quarter. Despite a 2.2 percent increase in consumer spending, overall GDP declined by 6.1 percent (annualized rate) in the first quarter, comparable to the 6.3 percent decline in the fourth quarter of last year. The reason for this similarity is that while consumer spending (70 percent of overall GDP) improved, other GDP components (business investment, exports and housing all declined at annualized rates in excess of 30 percent) deteriorated. Thus, the increase in consumer spending was largely offset by declines elsewhere.

The good news is that early reports on second quarter economic activity indicate that economic conditions are starting to improve. After a modest upturn in March, consumer confidence rebounded again in April, posting the largest monthly gain in 35 years! While, consumers continue to see current conditions as bleak, they are becoming more upbeat about the outlook, particularly for jobs and business conditions. This is a very positive sign for the economic outlook and provides further evidence that the recession should not extend beyond the end of this year.

The improvement in consumer confidence was matched with gains in manufacturing. The Institute for Supply Management’s (ISM) report on nation-wide manufacturing activity as well as district reports by both the Richmond and Kansas City Federal Reserve Banks showed that manufacturing conditions improved in April (see chart above).

While none of these reports showed that manufacturing activity actually increased last month, the improvements in April extend on gains made in the first quarter and provide further evidence that the worst of the 2008-2009 recession has past. It is important to note that the April ISM manufacturing report showed that overall orders as well as new export orders both improved for the third time in the past four months in April. This welcomed news points to a firming up of both the domestic and the global economy. And while an upturn in the domestic demand and exports is not expected until later in the second half of this year at the earliest, the pace of the downturn should start to moderate in the second quarter.

Manufacturing Activity

Economists generally agree that the lag time between a change to monetary policy and its intended effect is approximately 9 to 12 months and the lag between implementation of new fiscal policy and the expected result is between 12 months and 5 years.  The $1.3 trillion dollar stimulus package passed by Congress hadn’t yet had its 1000-plus pages drafted and we’d seen improvements in economic indicators.  (See rebound beginning in January in graph, above.)  Granted, the so-called stimulus was more of a payment for services rendered to those who assisted in Obama’s election but perhaps Democrats could have paid a little attention to the Congressional Budget Office when it reported that, “[T]he current recession…will last until the second half of 2009.”

This was reported in The Budget and Economic Outlook: Fiscal Years 2009 to 2019 (pdf):

CBO anticipates that the current recession, which started in December 2007, will last until the second half of 2009, making it the longest recession since World War II. (The longest such recessions otherwise, the 1973–1974 and 1981–1982 recessions, both lasted 16 months. If the current recession were to continue beyond midyear, it would last at least 19 months.) It could also be the deepest recession during the postwar period: By CBO’s estimates, economic output over the next two years will average 6.8 percent below its potential—that is, the level of output that would be produced if the economy’s resources were fully employed (see Figure 1). This recession, however, may not result in the highest unemployment rate. That rate, in CBO’s forecast, rises to 9.2 percent by early 2010 (up from a low of 4.4 percent at the end of 2006) but is still below the 10.8 percent rate seen near the end of the 1981–1982 recession.

That same report not only challenged the need for the stimulus bill but claimed it would cause greater harm in the long-term. So let me get this straight…we spent 1.3 trillion dollars on a stimulus plan that the CBO said was not needed and that would do more harm than good in the long run.  The economy is showing signs of recovery before the bill could possibly have and any effect.  Why was that, again?

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