Is a Second Economic Stimulus Package in the Works?

President Barack Obama said recently that a second [multi-billion] economic stimulus package isn’t needed yet, though he expects the U.S. economy and unemployment to worsen this year. He also acknowledged that due to worse than expected economic factors, initial forecasts from his administration missed the mark. The original $787 billion stimulus bill was rushed through Congress and signed in February 2009, with his chief economic advisers forecasting that it would help hold unemployment below 8 percent. It included tax cuts and spending on infrastructure projects that the president pledged would save or create 3.5 million jobs.

Obama defended his initial stimulus projections, saying the economy worsened once the legislation was enacted only weeks into his presidency. “Nobody understood what the depths of this recession were going to look like,” Obama said. “It was only significantly later that we suddenly get a report that the economy had tanked.” However, the President did acknowledge that he was not satisfied with the progress made around distributing the stimulus funds and that the administration had to do more work with a program to modify existing mortgages, which hasn’t “been keeping pace with all the foreclosures that are taking place.”

While the current administration does not think a second economic stimulus package is needed in the near term, I do think they will be back next year or the year after if the economy does not improve as indicated by a few of the following triggers or key economic vital signs:

• Unemployment rate nears 15%. This may seem far away, given the current unemployment rate of 9.5%, but in California it is already approaching 12%, and America's most populous state is a good leading indicator of national trends. Further, many economists think that the real unemployment numbers are much higher given part time, seasonal and non-participating workers are not reported in the unemployment figures. Should the official unemployment rate hit the 15% mark, it is almost certain that the Obama administration will be back for more funds to stimulate the economy.
  

• Home prices continue falling, declining 50% since the July 2006 peak. Median home prices are already down more than 26% to date and while there are signs of stabilization, worsening unemployment and rising interest rates could prompt further declines. In states like Florida and California, real estate values in some of boom areas are already down much more than 50%. With short sales and foreclosures still rising in many areas (reaching a record 1.8 million in May), despite government stabilization programs, their looks to be much more pain ahead. Even the new home buyer tax credit that have prompted many new home buyers into the market, look to have only provided a temporary buffer in now that interest rates are rising again.
  

• Democratic controlled Congress increases majority in mid-term elections. President Obama still has an overall approval rating of 65 percent and the support of a democrat controlled Congress. In the mid-term 2010-2011 congressional elections there is a good chance Congress could come further under Democratic control - reaching a filibuster majority, thereby making the Republican party virtually helpless in stopping any additional stimulus legislation. A worsening economy and support from the improvised masses waiting for more government handouts, will allow a more Democrat friendly consumer-focused stimulus package to be passed.
  

• Stock Markets Free Fall (Dow falls to 6000) and a large financial institution collapses. The stock market has been on a nice run of late and many investors are returning to the market as a sense of optimism pervades. However, as we have seen countless times, the market can fall just as fast as it rises leaving many investors licking their financial wounds. Given the stock market is a leading indicator of the economy, a sharp fall in the stock market generally signals further economic gloom and doom ahead. This would be compounded by a collapse of one or more large financial institutions, a primary trigger for the stock market collapse late last year. If all this comes to pass, the government will be forced to enact fiscal policy, like another consumer or corporate stimulus, to stem the tide.
  

• Global Markets Turmoil: The key to a sustained economic recovery will be a revival in real growth amongst the BRIC economies. These are the Brazilian, Russian, Indian and Chinese economies, that accounted for most of the economic growth over the last decade. They have the largest populations, are relatively debt free and are the biggest buyers of all things American. These new economies and their consumption will be the key for American growth in the 21st century. If these economies collapse, either thorough political problems of spiking inflation then the US economy will feel the pain.

To me the key statistic is unemployment. If consumers do not have jobs or feel in danger of losing their current one, then they will cut back on discretionary spending, delay buying or upgrading homes which all results in falling corporate profits and a worsening economy. If unemployment is “well into the teens” and still rising, it would indicate broader problems in the economy and serve as a strong catalyst for more fiscal stimulus actions. So despite record deficits and government debt, the administration will be back for more and I think they will be asking upwards of $1 trillion dollars for the next economic stimulus package!

Disclosure: No positions

Comments

[Dave Wrixon:]

Regarding the BRICs, the issue is not so much that they will grow but how much they will buy from the US. Frankly current exports are disappointing, and Americans need to change their marketing attitudes. Even this article suggest that these countries are desperate to buy into the American Culture. That approach is a recipe for despair. The US needs to develop product and market them in ways that are compatible with the cultures of the those countries. Failure to do this will result in catastrophe.

STOP TALKING TO THEM VERY LOUD IN ENGLISH.

Jun 28 05:52 AM

[Carlos Lam:]

Andy, all good points! However, there's a problem with your mid-term election prediction.

First, the party that doesn't control the White House usually GAINS congressional seats during a mid-term election. Indeed, the only times when a sitting President's party has picked up seats have been during the 1902, 1934, 1998, and 2002. The 1902 election occurred only a year after Pres. McKinley's assassination. The 1998 election came on the heels of Pres. Clinton's impeachment for lying under oath; the 2002 election came about a year after the 9/11 attacks.

Second, the Democratic Party already has a sixty-seat majority in the U.S. Senate, given Sen. Franken's win in MN and Sen. Specter's (PA) switch from the GOP. The U.S. House does not have filibusters.

Finally, to gauge possible congressional election results in a midterm election, one should really look at the approve/disapprove of the Congress. Currently, on RealClearPolitics, it's 36/54, which doesn't bode well for Congressional Democrats in conservative districts.

Since your forte is investing, not politics, I don't fault you for not knowing arcane intricacies of American electoral politics!

Jun 28 07:46 AM

[hfrisch:]

By next summer, with yet another class of graduates thrown onto the non-existent job market, and no pick up in business activity (Nobody I know says his business is any good) and deflation rampant, there will be tremendous pressure for the government to provide jobs.

Look for left leaning pressures on the administration, even the threat of a primary opponent from the left. Either this administration will act or there will be marches on Washington demanding jobs.

Jun 28 08:19 AM

[Northstar10000:]

I don't doubt the voters would be foolish enough to send more democrats after their record of complete foolishness. The dumbocrats have gotten everything they want so they get want is coming. My problem would be the Welcome to Iran election results. anyone who would believe the dumbocrats could expand their majority status in that economic environment would be subject to Iranian style election results. Acorns anyone !!!

Jun 28 10:03 AM

[Michael Clark:]

The problem for the republicans is that they are now smeared with the who caused the 2008 depression rag. The republicans have only one creed: 'free the businessmen (and bankers) so that they can make the country rich'. Well, the bankers and the businessmen sank the boat.

The democrats will keep spending -- because ANY party in power in this position has to DO SOMETHING. Can you imagine a president sitting on his thumb, saying: 'We'll just let these industries and these jobs disappear, because THAT'S THE FREE MARKET SYSTEM...?

Will the democrats' spend, spend, spend plan work? No.

What will work? Time. Time to unwind the debt.

What comes next? Protectionism; revolution in many countries; possibly world war. We've been down this road before -- it won't be the same, but it won't be absolutely different either.
____

“We have tried spending money… We are spending more than we have ever spent before and it does not work… After eight years of this Administration we have just as much unemployment as when we started.” - Henry Morgenthau, Jr., FDR’s Treasury Secretary, 1939

Jun 28 11:31 AM

[W.E. Heasley:]

Good article. You raise some interesting scenarios.

In regards to job creation and rising unemployment:

(1) simultaneously deploying Quantitative Easing and Keynesian Government Deficit Spending, in a current environment of high government debt (remember these two theories were developed in low or zero government debt), creates uncharted waters with plenty of unintended consequences,

(2) the “Stimulus” package of $800 billion is unlike prior Keynesian Infrastructure Spending Plans. The $800 billion is more akin to Social Engineering than Infrastructure Spending . That is, prior historical Keynesian Infrastructure were plans creating short term job creation from Infrastructure spending,

(3) no incentives exist in the current government policy for Private Capital Formation leading to Private Sector job creation.

(4) The current stimulus plan is based on wealth transfer and the recipients of the wealth being low income earners who have a 100% propensity to spend hence creating “stimulus“.

*** an odd out item is the Theory of Low Wage Earners having a 100% Propensity to Spend. Its an economic phenomena. However, to use this particular economic phenomena as the basis for a stimulus plan is strange to say the least. If one studies the theory you find that low wage earners experiencing additional income merely buy additional Staples of life. Completely understandable that their marginal propensity to spend is within Staples. However, what is the multiplier effect of additional Staples purchased?

The “accelerated debt” to create “stimulus” is something the average consumer/business can clearly understand and does not much enjoy. The average consumer/business thinks government debt is eventually their responsibility. The average consumer/business is trying to deleverage, conserve wealth, or find a job. Meanwhile the government spends huge sums of money via debt. The huge run up in government debt is counter to what the average consumer/business is trying to achieve. That becomes a rub.

The 2010 election? You are correct that jobs and unemployment will be the focus. The Political Economy of the election may well be the additional item of Increased Taxes on the back of unemployment. With the economy in major recession, given Federal, State, and Local Government drowning in debt, the average consumer/business, with a back drop of 12 or 14% unemployment, facing tax increases are going to be seeking a major change not the status quo.

Jun 28 08:52 PM