Most economists expected first quarter GDP to come in at 3.5%. However, when the preliminary results were released in April, the number was just 3.2%. That number was then revised downward to 3% in May. And just today, that number has been revised down yet again, to 2.7%.
This is a serious blow. Our government embarked on an absolutely massive $787 billion stimulus plan last year that was designed to step in for the struggling private sector. Consumers simply weren't consuming, or spending.
It's worth noting that $300 billion of that stimulus came in the form of tax cuts for 95% of Americans, but apparently they didn't put that money back into the economy. Instead, they used it to pay down debt.
No matter, the government took extraordinary steps to end the recession and renew economic growth.
Yet, despite the magnitude of this federal stimulus program, and $2.3 trillion in spending by the Federal Reserve, we still ended up with a measly 2.7% first quarter GDP.
And the problem has been worsening in the second quarter. The Commerce Department reported that consumer spending didn't grow at all in April. And then it reported that retail sales fell 1.2 percent in May, the first time they've fallen since Thanksgiving.
That makes you wonder where we go from here. The government is relying on foreigners (largely foreign governments) to loan us the money to continue our deficit spending. And the Fed is simply printing money out of thin air, which it then uses to buy Treasuries. This is akin to the left hand borrowing money from the right hand. It is an absolutely insane policy.
Our government hopes to cure its deep debt by growing its way out of the problem. But advanced economies are mature, and harder to grow.
The stunning reality is that growth has been rather slow for a number of years, as is often the case with mature economies. Since the second quarter of 2006, there has only been one quarter in which GDP was at least 4%. And the 5.6% growth in the fourth quarter of 2009 was largely the result of government stimulus spending.
According to Gallup, the under-employment rate is 20%. This includes not only the unemployed, but also those who can only find part-time jobs, yet want full-time work. Economist John Williams puts the real unemployment number at 22%.
Quarterly GDP would need to grow at 5-6% just to bring the national unemployment rate down a single percentage point. At that pace, a 4-5% unemployment rate) could be achieved by 2015.
One-quarter of all US mortgages are under water, which means nothing unless the owners suddenly need to sell. But the reality simply makes people feel poorer. It's a psychological effect, albeit a powerful one.
Even worse is this: roughly one-in-seven of the 52 million households with mortgages are in delinquency or foreclosure.
With numbers like these in mind, it's no wonder that consumers are retrenching. Clearly, these people aren't shopping or taking on further debt.
Instead of borrowing, Americans are paying down debt and saving at a 3.4% rate. That does not bode well for an economy 70% reliant on consumer spending.
But what about this alleged recovery the mainstream media has tried to continually sell us? What about the "greenshoots" we've heard so much about? It was all nonsense based solely on optimism. But that doesn't by groceries.
With the stock market up 80% in almost 14 months at its April peak, people "felt" like they had more money. Call it the "wealth effect." Let's hope that some of them took their profits while they could. The stock market is nothing more than a fantasy rooted in delusion and entirely lacking in fundamentals.
It's not just consumers who are retrenching either. In the first quarter, spending by state and local governments declined by the largest amount since 1981. Tax revenues have plummeted and they are all going broke (see the cover of this week's TIME).
Many states will soon need — and ask for — their own bailout from the Federal government. But where will the money come from?
The US, the largest debtor in the world, is simultaneously fighting two separate wars that are adding more than $12 billion to that debt each month. Meanwhile, the national debt has now exceeded $13 trillion.
There are — and will continue to be — calls for additional stimulus spending to keep the economy from going backwards. And there are already calls to extend the first-time home-buyer's credit. The program, which helped more than 2.5 million people buy homes, has already distributed $18 billion in tax credits.
And this week, the Senate shot down a bill that would have further extend unemployment benefits. The decision will affect nearly a million Americans and deny states billions of dollars in financial assistance. That will lead to even more draconian budget cuts. Congress had previously extended benefits four times since 2008.
Bu things will soon get even worse for the unemployed.
Department of Labor estimates show two million workers, or 20 percent of all recipients of jobless aid, will fall out of the Emergency Unemployment Compensation program by the second week of July.
While the denial of benefits certainly won't add to the deficit this year, it will create a drag on economic growth. Millions of Americans will be pumping less money back into the economy.
This, in conjunction with the exhaustion of stimulus funds, will cause GDP to falter in coming quarters. It's going to get ugly, folks.
Wall Street got a bailout. Detroit got a bailout. Now state, cities, and everyday Americans want a bailout too. To be truthful they all need it. But our government has been in debt for decades, and it's only getting worse.
The reality is that public sector needs a bailout, yet there is no private sector entity large enough to bailout the public sector.
So what now?
That's the million-dollar question. More stimulus means more debt. But without further stimulus and more aid to states and millions of individuals, the economy will limp along desperately.
There are no good choices, just harsh realities.
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