One of the major questions going forward has to do with the strength of the recovery and whether the economy is gaining momentum on its own or on the “sugar high” of fiscal and monetary stimulus. I would like to offer several arguments to support the former.
First, there’s no question that programs such as the TARP, the Fed’s numerous liquidity facilities and their Quantitative Easing policy were responsible for stemming the tide of financial Armageddon and the prevention of what would have been a second Great Depression (one that would have been worse than what occurred in the 1930’s). These actions stabilized financial markets and allowed them to operate until a certain level of calm was restored, providing an indirect benefit to the overall economy in the sense that things would have much worse had they not been present.
Second, virtually the entire market for residential real estate (both for single family homes and multifamily dwellings) is presently being supported by government because it’s basically impossible to obtain a mortgage in the U.S. without having it guaranteed by either Fannie Mae, Freddie Mac (the government sponsored enterprises or GSE’s) or by the Federal Housing Administration (FHA).
Despite the stabilization these efforts provided, it’s my contention that the economy is now growing to a large degree on its own. Let me explain.
What’s also generally accepted is that the Fed’s policies were an enormous help for Wall St. but were of little if any direct benefit to Main St (at least in terms of creating new jobs). In other words, if you have access to the Fed’s programs (i.e. are a bank or a Wall St. Firm) you’re doing well. Banks, including bank holding companies like Goldman Sachs and Morgan Stanley, can borrow at real interest rates which are negative and put that capital to work (for example by buying equities).
Last time I checked, Mr. Joe Citizen had no such access to the Fed’s largess. In fact, our average citizen (and small to medium size business) is currently shut out of the credit markets for all intents and purposes. Amazingly, despite all of the assistance given to the nation’s financial firms, consumer borrowing actually shrank by over $17 billion in November 2009 alone. Business lending, outside of the Small Business Administration, is virtually nil.
What’s also true is that many economists (noble prize winners Paul Krugman and Joseph Stiglitz among them) are now saying that the Obama administration’s fiscal stimulus plan was too small to have any significant effect. Some are even arguing that second stimulus is necessary (although the current political environment will probably not allow it).
So here’s my argument for a self-sustaining recovery, which really is just an exercise in logic:
If the Fed’s monetary policies and the government’s stimulus plan either didn’t apply or were too small to help the average citizen and business, what it means is that the economy, to a large extent, is growing on its own. And if that’s true, it means that the recovery will be self-sustaining.
It’s true that the first estimate of 4th quarter GDP showed that nearly 60% of the reported growth was due to one of the biggest pops in inventories on record, and that inventory builds at this pace are likely to be temporary. But it also showed that consumer spending ex-autos grew at a 3% annualized pace and that incomes rose by 4%, all without the help of the Fed or even the help of programs like cash for clunkers, which ended in September.
Now, I don’t expect to see GDP be sustained at this level throughout 2010. Inventory restocking will fade sometime in the first half of the year and we’re not likely to see components such as residential construction increase to the point where the difference can be made up. But if spending is going up we’re likely to see the employment situation improve (as it has been) at least in terms of new unemployment claims and continuing benefits.
But I do expect to see real GDP grow in the area of 3% to 3.5% in 2010, and it will be the consumer and small businesses which will lead the way despite the lack of easy credit and meaningful government support.