Here is a nice graphic that shows the components of GDP. As you can see, durable goods (think "cars") is collapsing. Spending on services is holding up. But consumers have cut spending by nearly 5% and the non-durables are down 10%:
This is a nosedive. The only thing that will bring the nose up and let the economy fly again is the consumer of last resort, the government. That is the role of Obama's stimulus bill. Given that the economy is $14.5 trillion, and things are collapsing by 6.2% in Q4 of 2008, an $800 billion stimulus won't fill the hole. If the economy stopped dropping, then an $800 billion stimulus would fill in the missing purchases, but everything is headed lower, so Obama's stimulus would have been excellent back last September. But Bush still held the wheel and Bush argued that "the economy is fundamentally sound" (just like John McCain, and just like Herbert Hoover). So the opportunity to pull up the nose with an $800 billion injection is past. It will take even more spending by government to pull the trajectory of the economy up out of its deepening slump.
Saturday, February 28, 2009
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