The foundation for any durable recovery in a modern industrial economy rests with the organic dynamism of the private sector. Ask anyone in Japan as to how repeated rounds of fiscal stimulus played out over the past two decades.
Bank lending still contracting
We can only sit back and marvel at how the U.S. government has managed to put the economy back together, but it’s the same problem as the first little pig had in fending off the big bad wolf. Straw will only hold up for so long. There is tremendous fiscal largesse associated with this economic turnaround, which we expect will be a one-quarter wonder, not unlike the 2002Q1 experience with a flashy bear market rally and brief inventory and stimulus-led rebound in growth. The foundation for any durable recovery in a modern industrial economy rests with the organic dynamism of the private sector. Ask anyone in Japan as to how repeated rounds of fiscal stimulus played out over the past two decades. We are still in a post-bubble credit collapse world and there are still too many uncertainties associated with the outlook for the economy, corporate earnings, financial stability and fiscal rectitude (or recklessness is more like it). Wages are deflating at a record rate and credit in the banking system is still contracting as banks continue to shrink their balance sheets. Three-quarters of the corporate universe have no revenue growth to speak of and as we report below, only one-third of the ISM industries posted growth in July and barely more than one in ten were adding to payrolls.
This is reason to rejoice?
No doubt we are seeing better housing market data-points and that is critical, but it is still too early to tell whether this is noise on what is still a fundamental downtrend or if we have, in fact, hit a new inflection point. With unemployment mounting and credit contracting, it is going to be fascinating to see where the driver for growth is going to come from. The auto sector is in a secular decline and the demographic backdrop for housing is poor. Perhaps it will be infrastructure or medical technology or a sustained decline in Asian savings rates that propels exports in the developed world. We are hopeful, but still skeptical over the sustainability of the economic rebound we will see this quarter, and even more dubious over the market’s interpretation of how the data are evolving.
At the market lows of 2003, it was becoming clear that (i) a war; (ii) reflation of the housing stock; and (iii) a parabolic credit cycle were all going to spark a dramatic recovery. The Bush tax cuts were just gravy on the beef Wellington. But the missing link now is credit. For the second week in a row, bank-wide mortgage lending fell $22.0 billion for the week ending July 22. Consumer lending fell $1.1 billion and has now declined for eight weeks running (cumulative loss of $16.0 billion or a 13% annualized slide). Commercial & Industrial loans contracted $8.0 billion during the latest reporting week and has collapsed at a 15% annual rate over the past two months — interesting way to embark on a restocking phase: with no inventory financing! All told, bank lending to households and businesses shrunk $31.0 billion during the July 22nd week and is down a record $114.0 billion or an 11% annual rate over the past eight weeks.
But the banks did add $12.0 billion to their cash hoard that week, bringing the total accumulation to $118 billion over the past three weeks.
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Wait, you mean that the banks are now “saving” since it is clear the record down lending is almost equal to the accumulation of “cash in Hand” by the banks (114 vs 118 B). I guess the rail transportation decline is telling the real story since nothing is moving from one place to another….
Just as numbers are being created to show that housing data are “improving” and therefore we are looking at a stabilizing economy, Fannie Mae is looking for $10 billion plus to stay in business. No doubt Freddie Mac is standing in the wings to claim support for its shortfalls soon. What the government has done with the all the stimulus is create a French Revolution scenario: “Apres Nous Le Deluge”. Of course giant stimulus packages as have been created will have an effect on the economy, however it will be too short and it will not return us to “The Way We Were”. Those day are gone.
The postal service… at least you're investing it in the people's business and not in those that at the end of the year are going to pay themselves bonusses because they “made it possible that there business survived”… forgetting that that was with the people's money. You think that is not going to happen?
As I watch new government antics daily I find myself more confused, who are we actually bailing out? Is it indeed large business, small business or the government itself? I say this as I watched a hearing in Washington yesterday where our US Gov. Postal service says it is showing a $7B loss, the Rx for this is to close many postal facilities and stop Saturday deliveries, and hear this, tapping into the TARP money to bail it out????? So let me see if I have this stright in my mind, our Government is now going to bail itself out, is that what I heard???????? Again, my grandmother was right, you can't drink yourself sober nor can you borrow yourself out of debt, I guess some lessons are just never learned.
But then when I just give it a little more thought it sort of all makes sense now. We, that would be you and I, own most of GM and Chrysler, and have already spent $1B on the clunker deal. The Senate passed ANOTHER $2B last night for the clunker deal. So this is how it sums up. We, you and I, gave all the money needed to two large businesses so they would not go out of business, now we are paying people to do business with them. You know, I think ole Charlie Ponzi would even marvel at this one.
Absolutely it will happen, they are probably planning on it as I write this. One rule an old farmer told me once about raising hogs. “They will always return to the trough and they will always want and eat more”.