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Tuesday, May 01, 2007

"To say that ex-housing the economy is doing just fine is tantamount to claiming that, ex-Iraq, Bush's Middle-East policy is a rousing success"

Caroline Baum sees weakness in the economy that extends beyond the housing sector:

Housing? What Housing? I Don't See Any Housing, by Caroline Baum, Bloomberg: Excluding housing, the U.S. economy is doing just fine.

That's the latest rationalization of a select group of operators who think that the Bush administration's 4.6 percentage point cut in the top marginal tax rate and 5-point reduction in the top capital gains rate can protect the economy from any and all ills.

To say that ex-housing the economy is doing just fine is tantamount to claiming that, ex-Iraq, Bush's Middle-East policy is a rousing success.

How valid is the claim that outside of housing everything is hunky dory? Let's go to the videotape to see how housing- centric the U.S. economy's weakness really is.

The Commerce Department reported Friday that real gross domestic product rose 1.3 percent in the first quarter, the slowest pace in four years. ... Investment in housing, the purported culprit, fell 17 percent... Residential investment ... subtracted from growth for the sixth consecutive quarter, something that hasn't happened since 1980.

The first quarter's sluggish growth wasn't confined to housing, however. Exports declined, inventories were a small drag, and capital spending (investment in equipment and software) rebounded 1.9 percent -- better than expected ... but nothing to write home about after declines in the second and fourth quarters of last year.

''The initial weakness was in housing, but the weakness in capital spending is not a cross-infection from housing,'' says Ian Shepherdson, chief U.S. economist at High Frequency Economics...

One year ago, capital spending was growing at a 9 percent year-over-year rate, he points out. Now it's zero.

''A year ago, people said capital spending was going to rescue us as housing slowed,'' he says. ''Capital spending is down to zero (year-on-year). There's been an unambiguous slowdown.'' ...

''Are businesses going to step up their pace of capital spending with the utilization rate falling and consumer demand slowing?'' asks Paul Kasriel, director of economic research at the Northern Trust Corp. in Chicago.

He clearly doesn't think so.

The American consumer keeps on trucking at a healthy pace. Consumer spending rose 3.8 percent last quarter, the only sector outside of government to contribute to growth. ... But even the consumer is showing some signs of fatigue. ...

The Fed's preferred price measure, the personal consumption expenditures price index excluding food and energy, ... rose 2.2 percent [last quarter]. So far, a deceleration in this index is still very much a Fed forecast...

Another quarter of growth with a 1 percent handle is apt to make Fed officials nervous for the simple reason that there is no mandate for a recession with inflation running at 2-something percent. When growth is that slow, all it takes is a big quarterly inventory decline to thrust a negative sign in front of GDP, which in turn leads to a diminution in confidence. ...

Imagine how it would look if Congress were to ask [Ben Bernanke] to explain why the Fed let the economy slip into recession with inflation so low. Would Bernanke be able to keep a straight face when he told them that GDP ex-housing was solid?

Heck, GDP excluding consumer spending, business investment, housing and exports was robust in the Great Depression, too.

    Posted by on Tuesday, May 1, 2007 at 12:06 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (13)

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