No Confidence, but we have “Preconditions”

No matter where you turn, the evidence of an economic slowdown is here.  The recent figures are showing slowdowns in housing, business investment and consumer spending!

Despite these facts, Ben Bernanke is in a room full of “Fiat Fools” in Wyoming today saying that “preconditions” for growth in 2011 are “in place.”  A quick turn to Google and you can see that a precondition is defined as a “condition that must exist or be established before something can occur or be considered; a prerequisite.”  In computer programming, a precondition is a condition or predicate that must always be true just prior to the execution of some section of code. 

What condition is present that gives the Fed chairman the ability to use the word precondition? What can he or President Obama do to reignite growth in the USA?  Call the Chinese? 

Over the past 18 months, government spending programs have not create any new demand; they only shifted the time at which American consumers were going to make purchases they were going to make anyway.  And today’s consumer confidence print from the University of Michigan is proof of that.       

The University of Michigan final index of consumer sentiment came in at 68.9 from 67.8 in July, which was the lowest reading since November 2009.  What is even more interesting is that the FED chairman made the statement of “preconditions” knowing that 2Q GDP was going to slow by 50% quarter-over-quarter.  

All that government spending accomplished was to not let the market forces run their course and added uncertainty into the economy, which is making it harder for businesses to plan their next move (i.e. not hiring additional employees).  The leveraging of our balance sheet did not create new wealth for consumers; it diverted capital and resources from other places. 

Given the facts as we see them today, we see the preconditions in place for a significant slowdown in consumer spending in 4Q10.

Howard Penney

No Confidence, but we have “Preconditions”   - hpchart