Published August 8, 2011
* Following Friday’s downward revisions, we now expect real GDP to increase just 2%-2½% (annualized) through the end of 2012 and the unemployment rate to rise slightly to 9¼% during this period.
This is still higher than the first half, so presumably corporations will have a better second half as well, and they did just fine in the first half.
And with lower gasoline prices, consumers get a nice break there which should firm their spending on other things as well.
The tighter fiscal won’t matter for this year, and markets won’t discount what may happen in November until it’s closer to actually happening.
So still looks to me like the recent sell off in stocks was mainly technical, as the initial knee jerk sell off from the debt ceiling and downgrade uncertainties triggered further selling by those with short options positions, much like the crash of 1987.
And, like then, and unlike early 2008, the current federal deficit seems more than large to me to keep things chugging along at muddle through levels of modest growth, continued too high unemployment, and decent corporate profits and investment.
Yes, risks remain. Europe is a continuous risk, but the ECB, once again, stepped in and wrote the check. China looks to be slipping but the lower commodity prices will help US consumers maybe about as much as they hurt the earnings of some corps.
So for now, with the options related stock selling over, it looks like we’re back to calmer waters for a while.
And Congress goes back to trying to cut the deficit to put people back to work.
Someone needs to tell them they haven’t run out of dollars, they aren’t dependent on China, and they can’t become the next Greece, and so yes, the deficit is too small given the current output gap.
But until then, we keep working to become the next Japan.