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Bewitched, Bothered, Bewildered, Broke

Four words to describe the economy.

12:00 AM, Aug 28, 2010 • By IRWIN M. STELZER
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"Bewitched, bothered and bewildered," warbled Ella Fitzgerald, among others. That old song, written in 1940 by Lorenz Hart and Richard Rogers, just about describes what is going on in the American economy. When seven of the seventeen officials of the Federal Reserve Board dissent from the chairman’s decision to keep the Fed’s $2.05 trillion pile of mortgages and U.S. Treasuries from shrinking, uncertainty takes on a new meaning. Ten want to set the stage for printing more money, seven think enough is enough.

Bewitched, Bothered, Bewildered, Broke

President Barack Obama and Fed chairman Ben Bernanke.

Fed chairman Ben Bernanke used the platform of the gathering of central bankers in Jackson Hole yesterday to attempt to reassure markets by promising additional monetary stimulus if it is needed. But he also confessed that “fiscal stimulus … can drive recovery only temporarily” -- in the end, it is up to consumers and businesses to create demand for goods and services. Worse, he confessed that the Fed had misread the mortgage market and allowed developments “inconsistent” with the Fed’s intention to keep policy loose. Makes one wonder if the Fed really has a grip on things.

For investors, uncertainty is the way station to fear. If those Fed experts can’t agree, we can forgive investors for being so unsure of what is next in store for the economy that they flee from shares to the safety -- alleged safety, say some -- of U.S. treasuries, despite their extraordinarily low yields. Never mind that earnings have been surprisingly good. All it takes is some bad economic news, and investors put their cash where it yields almost no return at all -- but is “safe.”

And of bad news there is more than enough. The economy, it turns out, grew at an annual rate of only 1.6 percent in the second quarter, rather than 2.4 percent as originally estimated. That means that the growth rate in the most recent three quarters has dropped steadily, from 5.0 percent at the end of 2009 to 3.7 percent and 1.6 percent in the first two quarters of this year.

Both consumers and businessmen are sitting on the sidelines. The July drop in sales of new (-32 percent year-on-year) and existing homes (-26 percent) to record-low levels exceeded even the gloomiest expectations, and can no longer be blamed on the expiration of the Homebuyer Tax Credit. Low mortgage rates seem to be offset by tighter credit standards, job insecurity is being fuelled by rising initial claims for unemployment insurance, and buyers feel it pays to wait because prices will be lower tomorrow.

Potential homebuyers are not the only squeamish economic actors. Capital goods orders, excluding defense spending and the 76 percent increase in the volatile aircraft segment, fell 8 percent, the biggest drop since January 2009. This “highlight[s] the risk of a significant slowdown of investment spending,” concludes Bernd Weidensteiner of Commerzbank. American corporations seem to be using some of their $2 trillion in idle cash to return to the acquisitions market, bad news for job seekers since successful acquisitions usually mean lay-offs in the acquired companies -- “efficiencies” and “cost savings” are the preferred description. 

Add to this bad news an even more powerful drag on the economy: uncertainty. Bernanke says the Fed is loading its monetary policy gun by keeping its balance sheet from shrinking, but no one knows whether or when he will pull the trigger. Besides, even if he does, recent history suggests that the Fed can’t lure enough money from the wallets of debt-burdened consumers or from corporate treasuries to put the economy on a solid growth path. Mike Dude, CEO of vaunted retailer Wal-Mart, says, “The slow economic recovery will continue to affect our customers, and we expect they will remain cautious about spending.” Students are being made to do with their old PCs, and affluent fashionistas are eyeing lower-priced editions of their favorite designers’ lines.

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