If Incomes are Down, Where is the Economic Spending coming from? Industrial Production ? Credit Contraction?




With 8 million jobs lost in this great recession, it is rather surprising to see so many people enter into a deep capture mode of believing in a quick and efficient recovery. If we look at data in the misery index, the average American has a hard time swallowing the jagged economic recovery pill. They look at their paychecks and see no recovery. They look at rising healthcare costs and see no recovery. They send their kids to colleges where costs are going up 8,9, or even 10 percent per year. The data simply does not reflect this actual reality. Are things better than say in March? Depends on what we look at. Sure, the stock market is up a record 60 percent but does your life feel 60 percent better? Is your pay up by 60 percent? What about your bottom line? If we look at disposable income for the average American, it has actually fallen. If it follows that two-thirds of our economy is based on spending, then where is this money coming from?



With over 70 years of data, disposable income has only gone negative on a year over year basis one other time and this was in the late 1940s. This is really not a typical occurrence. Yet when we deconstruct the GDP report and 3.5 percent growth, we realize that this equation:

GDP = private consumption + gross investment + government spending + (exports - imports)

A large part of that growth came from government spending. The other growth came largely because of cash for clunkers with the auto sector contributing 1.6 percent of the 3.5 percent growth (typically about 0.1. or 0.2 percent). In other words, there should be little shock that GDP was up. Why not spend $2 trillion and make it go up by 7 percent? Of course, any thoughtful analysis shows the error in this reasoning. It is an adrenaline shot to the chest administered by the bailout syringe. The U.S. Treasury and Federal Reserve are juicing the markets and hoping this recovery sticks. The latest data relies on purely government back stops. If we look at industrial production, things are still looking like a recession





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