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Can the U.S. Avoid European Contagion?

We might have to wait until after election day to find out.

12:00 AM, May 8, 2010 • By IRWIN M. STELZER
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Auto showrooms are not the only places enjoying greater consumer traffic. Consumers are snapping up appliances, the iPad’s sales of one million units being the most publicized.  A survey by the National Association of Business Economics found that 57 percent of respondents are experiencing an increase in demand, while only 6 percent say demand is falling.

There is more good news from companies reporting profits increases and shops and malls experiencing an increase in traffic. Enough, in fact, to make a one-handed economist smile happily. Unfortunately, there are few such, so there is the inevitable “on the other hand.” The housing market has been benefiting from tax breaks for new home buyers and support of the mortgage market by the Federal Reserve Board and Freddie Mac and Fannie Mae, aptly called GSEs, government supported enterprises. The tax break has expired, the Fed is reducing its support of the mortgage market, and Freddie Mac, the nation’s second-largest provider of residential mortgage funds, is asking congress for an additional $10.6 billion in federal aid after losing $6.7 billion in the first quarter of this year. Just how much all of this will affect the very tentative recovery in the housing market only a braver man than this writer would predict.

Then there are the problems created by a wildly expansive fiscal policy. The current recovery would be threatened if interest rates were to rise significantly. That is not outside the realm of possibility, given our ongoing deficits, investors’ worries about sovereign debt, and the rating agencies’ warnings that the U.S. had better get its house in order or face a downgrade.

Add to this the virtual certainty that when the president’s debt reduction commission reports in December -- not coincidentally after the November elections -- it will recommend tax increases that will be piled on top of the added costs small and medium-size businesses face from the health care “reform.” Not a recipe for rapid growth.

Still, economists at Goldman Sachs are predicting that the current 3 percent growth rate, after falling to 1.5 percent in the second half of this year, will re-accelerate to the 2.5 -3.5 percent range in 2011, as “Fed policy remains easy and the multiplier effects from earlier fiscal policies are still rippling through the economy.” Which doesn’t speak too well for prospects after the Fed tightens and Obama is forced to reduce deficit spending. But that’s for later. Now, spring is sprung, the economy is on the move, and Greece remains far away. 

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