End of Month Wrapup

The Lehmann Letter (SM)

The Commerce Department's recent report that first-quarter GDP grew by a meager 1.8% focused our attention, once again, on the economy's prospects:

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

Aggregate demand's growth has been weak. At this stage in the recovery household expenditures on residential construction and durable goods as well as business expenditures on plant and equipment should be surging forward. But they're not.

At the same time, government expenditures are shrinking. The federal government's stimulus plan worked to boost the economy out of the depths of recession. But it's over now and federal expenditures are no longer growing. Meanwhile state and local governments have been faced with shrinking tax revenues and have also reduced their expenditures in response to this shortfall. As a result total government spending has become an anchor holding the economy down rather than a balloon hoisting the economy upward.

There is no dot-com boom à la the 1990s, and there is no real-estate boom à la the 2000s. Household balance sheets are compromised and gasoline prices are high. But most importantly, residential real estate remains in the doldrums. The economy can't and won't achieve prosperity until residential real estate emerges from hibernation. There is no sign that will happen soon.

© 2011 Michael B. Lehmann