America's Grossly Distorted Product
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Thu Oct 29 14:36:38 2009 EDT
By Liam Denning
A DOW JONES COLUMN
If the Obama administration was managing a company, it might have hoped the
latest gross domestic product numbers would be greeted with cries of "great
quarter, guys!"
At least the stock-market obliged, rising on better-than-expected GDP data
Thursday morning. But then bulls have grown used to looking to Washington,
D.C., for inspiration. Zero rates and stimulus programs boost economic data as
well as nudge money towards riskier assets.
Fully 2.2 percentage points of the third quarter's 3.5% growth figure related
to vehicle purchases and residential construction, both juiced by government
support. Federal spending added 0.6% to growth.
If these GDP data really were company earnings, they would be what analysts
euphemistically call "low quality." Investors buying into the market on these
figures are ignoring weekly unemployment claims data that came in above 500,000
again on the same day.
The wider danger is that all these short-term fixes leave the economy
dangerously addicted to taxpayer-funded steroids. The circularity in the
housing market, whereby Washington provides tax-breaks to first-time buyers,
guarantees most of the mortgages written, and then buys most of those, beggars
belief - and suggests a worrying case of amnesia following the bursting of the
housing bubble.
Another idea that has been floated is to give tax-breaks to firms encouraging
them to hire. Yet with quarterly earnings besting forecasts so far, it doesn't
look like firms are exactly short of funds to pay workers. What they lack is a
clear sense that the economy is on a stable footing. Distorting the cost of
money, durable goods demand and labor productivity will not help that; it will
merely serve to build up further problems. |
