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Why GDP is Soft, and is likely to stay that way

Posted By Barry Ritholtz On January 29, 2005 @ 2:41 pm In Economy,Politics,War/Defense | Comments Disabled

Yesterday’s GDP number was a downside surprise –  at least to some. I love when CNBC schedules mega-Bulls for Squawk Box, and then  hits ‘em with a nasty number that leaves ‘em stammering.

Its a good thing.

This is not a 4%+ economy. Are we all clear on that now? Good.  I’ve been an outlier on the GDP numbers for a while, on the low end of the scale (2.5-3.25%).

Yesterday, they came to papa: 

Wsj_econ_chartsgdp_01282005_2Its apparent that the 2003 Tax cuts had a huge, albeit temporary impact on consumer spending. The Q3 2003 spike was shows that the maximum impact was only transitory. As the datapoints continue to make clear, it was mostly a one time shot of adrenaline, with attenuating impact on the macro environment. As we mentioned in The Frankenstein Economy [1], once the tax cut stimulus faded, there would be little in the way of organic self-sustaining growth — business hiring, capex spending, and even on durable goods.   

This is an inherent problem with stimulating the stock market, and hoping it leads, rather than stimulating the economy, and hoping the stock market  follows.

Now, as all the prior stimulus fades — as interest rates go higher, the tax breaks fade, the deficit spending starts scaring the senate — something else must be found to replace the spent fuel in order to continue the economic expansion and power the market higher.

What might that be . . .?

Well, it could be accomodative interest rates, but that seems to be unlikely . . .  Or it could be the continued weak dollar policy, which everyone but John Snow seems to be willing to acknowledge in public. Or it could be another massive tax cut, something increasingly unlikely to take place.

More deficit spending via public works? Unlikely with this administration.

Hey, I have an idea! How about another significant War? Good for the economy, its an acceptable form of deficit spending to the supply siders, and its (somewhat) stimulative, in a (Shhhh!) Keynsian sort of way.

Too bad there aren’t any imminent threats or targets on the horizon . . .

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[1] The Frankenstein Economy: http://bigpicture.typepad.com/comments/2003/10/the_frankenstei.html

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