The dire economic condition of the U.S. economy seems to have eased somewhat. That was indicated by the slowdown in the pace of job losses reported for May. It is a sad commentary on how bad things have been over the past nine months that the good news is that the economy seems to be beginning to bottom out.
It is, of course, extremely difficult to predict when the overall economy will be turning better. Many economists predict that we will see a modest economic upturn in the fourth quarter of this year, on the order of one to two percent growth. Few are attributing this expected growth to actions that the Congress has taken. The effects of the stimulus bill have been haphazard, and much of the money has yet to have much effect – especially in the manufacturing sector where new projects have been slow to get started. The expected surge in green manufacturing has yet to occur. It is hard to interest investors in windmills when the price of carbon-based products is still not onerous to the general public.
The stock market has begun to turn upwards. That is most likely a result of return to confidence about the financial sector. It is the one area where the government has gone all out to turn things around. Since the beginning of the credit crisis the Federal Reserve has expanded credit more than $1.2 trillion. Moreover, the yield curves for banks have improved dramatically. They have been able to borrow money from the Fed at nearly zero interest and lend it out at relatively high rates, creating a yield curve that is quite attractive.
The Treasury has also announced that nearly all the big banks that underwent the so-called “stress tests” passed those tests to the satisfaction of the regulators. This should be encouraging to both investors and the banks themselves. But there are nagging doubts about just how rigorous these tests were, and there were reports that the banks themselves were allowed to bargain over just what the results would say. There is still uncertainty about the true health of the banking sector.
We have also seen the return of the non-bank commercial paper market, which nearly disappeared at the height of the credit crunch. Again, this was an area where government intervention and guarantees calmed the markets and lured investors back to this necessary source of financing. Before the credit crunch, commercial banks were supplying only 40 percent of total credit, so this part of the financial sector was a critical vehicle to rehabilitate.
What, then, can we expect in the coming months? Will the economy continue to limp along as it has over the past year? Will we see credit flowing once again into the manufacturing sector? Or are we at the beginning of a Japan-style “lost decade,” created by credit markets in which investors have lost confidence? It has to be humiliating for the U.S. Secretary of the Treasury to sit quietly while he is lectured on fiscal restraint by the Finance Minister of the People’s Republic of China; or, as the Chinese Vice Minister said recently in an interview with an American journalist, “Now that you owe us a trillion dollars, the least you can do is talk nicely to us.”
The consensus is that we will not see another stimulus bill this year, even if the current economy worsens and we see a double dip recession. Conservative Democrats are beginning to realize the tremendous debt burden that they are placing on their children’s generation. The Congressional Budget Office predicts that there will be $9.3 trillion of new debt over the next decade. That is also why there is not likely to be another attempt at an auto bailout. As the price tag climbs to $50 billion, the Congress has lost the stomach for any further action, no matter how justified. That leaves many auto suppliers – including members of the manufacturing technology industry – exposed to Chrysler’s and General Motors’ woes. A similar reaction against further funding has formed against the financial sector, and we may not have seen the end of punitive legislation against financial sector executives, given the degree of blame being attributed to them for the current economic mess.
2009 promises to fulfill the Chinese curse: “May you live in interesting times.”