Five factors that could propel a U.S. economic recovery
Even so, economic fundamentals are such that rarely is one side 100% correct, and given the general media's penchant for emphasizing the negative, a healthy skepticism suggests presenting the contrarian view - - in this case the bullish case.
With the above as background, here are five factors that could propel a U.S. economic recovery:
1) The bank bailout – Yes, a plan to rid the banking system of toxic assets - - or at least get them into a federal or private/public 'side car' where they would have time to regain value, would aid the U.S. recovery.
The somber point is that given the importance of the credit markets to commerce, no enduring U.S. recovery can occur without an effective bank bailout plan that enables banks to resume lending. But the hopeful view argues that once that occurs, it will be a major step toward recovery.
2) Fiscal stimulus package - Railed at by both Democrats and Republicans as being neither what each side wanted nor perfect, the stimulus plan will, nevertheless, stimulate commercial activity. Increased unemployment compensation and direct assistance to states will provide immediate stimulus, while infrastructure programs, investment tax credits, and income tax cuts will provide longer-term juice to the economy. The best way to view the stimulus package? President Bill Clinton, speaking on CNN Tuesday, called it "a bridge over troubled water," until the bank bailout is passed and credit flows have been normalized. That's about right. (And no doubt Simon & Garfunkel will waive copyright for the former president.)
3) Quantitative easing – The Fed has been nimble, the Fed has been quick, the Fed has deployed a term auction fix. The U.S. Federal Reserve's many term auction facilities have kept the banking system functioning and credit flowing, even while the U.S. Treasury devises a plan to deal with toxic assets. True, the Fed's actions can not by themselves lead to robust GDP growth, but they have prevented a collapse of the U.S. and global financial systems: not bad, as they say, all things considered. Further, an expansion of the Fed's Term Asset-Backed Securities Lending Facility should improve access to consumer loans, such as auto loans and credit cards - - further stimulating the economy.
4) Low interest rates – Assuming a successful toxic asset plan from the U.S. Treasury, relatively low mortgage rates should prevail, and at some point -- but it's hard to pinpoint which quarter this will occur -- the low mortgage rates will stimulate potential home purchasers to buy homes. Admittedly, job market conditions may have to reverse, as well -- few people want to buy a home when large layoffs are occurring -- but if job market conditions improve in late spring, that could spur home buyers, providing a modest tailwind for the economy.
5) Gasoline prices – Yes, it's hard to believe, oil is sloshing around in global markets, despite a more than 4-million-barrel-per-day supply reduction by OPEC. Above-norm prices for oil used for gasoline have put a mini-floor under gasoline prices in the U.S. as of mid-February, but the bigger picture is relatively low gasoline prices, which will increase U.S. consumers' disposable income, and equally significant, put a lid on business transportation costs. Each lower cost category will serve to stimulate the U.S. economy.
Economic Analysis: Investors don't have to run down to the local newsstand to learn about the negative factors hurting the U.S. economy, and this is not an attempt to sugarcoat those conditions: the U.S. economy remains in a pronounced recession. Still, it bears repeating that so long as the United States retains its productive capacity - - and its common sense - - it will solve its problems. It's also important to point out that, despite the large asset destruction over the past 15 months, the U.S. still has $50-65 trillion in wealth, depending on the methodology used. In sum, there are factors working right now to turn the economy's tide, and provided the bank rescue plan fixes the banking system, that tide will turn.
Financial Editor Joseph Lazzaro is based in New York.