Financial Planning: Is the Economy Headed in the Wrong Direction?

Kyle Blackburn | Blackburn Financial Group

Economic news in the first part of 2013 has been generally positive. Unemployment numbers have been gradually improving as businesses start to hire again. Manufacturing data has been encouraging, and the housing market is finally beginning to pick up steam.

For that reason, many economists were finally beginning to feel good about the economy. It’s been a miserable several years, after all, beginning with the housing market collapse in 2007. But now, there is fresh reason to worry that the economic “recovery” may not be anywhere near as strong as advertised. And it appears that the government spending cuts mandated in the sequester may be making the situation even worse. The New York Times reports:

At first glance, the latest economic growth report, released Friday, appears to show the economy revving up. In reality, the economy is either stuck in low gear, or worse, slowing to a stop as budget cuts harm not only the users of overstretched government services but the overall economy. This precarious situation urgently calls for more federal spending, not less, though that message has been lost on Congress.

 From January through March, the economy grew at a modest annual rate of 2.5 percent, compared with a measly 0.4 percent in the last three months of 2012. That seems like a big jump, but it was less than economists expected and does not alter the big picture. Since the recession ended in mid-2009, quarterly growth has averaged around 2 percent. Every acceleration from that pace has inevitably petered out, which is why unemployment is high and pay is low nearly four years into what is officially an economic recovery.

Worse, there are signs in the latest report of a renewed slowdown. Excluding inventories, which tend to artificially depress growth in some quarters and raise it in others, growth in the first quarter of 2013 was only 1.5 percent, compared with 1.9 percent in the fourth quarter of 2012 and 2.4 percent in the third quarter.

Underneath it all is the fiscal drag from ill-advised and ill-timed austerity measures. With the expiration this year of the payroll tax break, personal income declined sharply last quarter, forcing consumers to draw on their savings to support their spending. That is unsustainable, presaging weaker consumption in the months to come and, with it, weaker overall growth.

This is bad news for investors and business owners in particular. It is particularly discouraging considering the timing—just as…..


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