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Government Programs .. One Hit Wonder?

September 9, 2009 – 11:01 am

Is the stock market correction here? Is it over? It is too early to tell but there certainly is weakness in stock prices while at the same time we have had strength reported on the economic front this week. The news was much better than expected in the ISM manufacturing sector. The reading was 52.9 in August up from 48.9 in July. Any reading above 50 means growth, so not just an improvement from bad to less bad but actually to good. Of course there is a problem with the number. How much of it was affected by the Clunkers for Cash? A program that has expired and since it is done what will it mean for this month’s ISM number without that stimulus?

Also, out this past week was July’s pending home sales number. It was up 3.2% from June and in the West it was up 12%. That is 6 months in a row of improvement. Affordability seemed to overcome layoffs and tighter qualifying requirements. On the other hand the tax stimulus for first time buyers, which helped greatly, expires in a couple months. Will we see numbers in home sales slip because of the expiration of that program?

The jobs report for August that came out last Friday showed weakness, but that is to be expected, while productivity has spiked. The workers that have jobs are working harder with no additional salary. This is a normal cycle event.

All the different programs by our government are making it difficult to ferret out the one time benefit to our economy from the possible long term recovery. We have seen steadily improving numbers. The banks are making lots of money and repaying the government all the loans and guarantees. In fact the government is making billions in profits from the financial bail outs that, so far, have been money making deals. Of course there are still risks in loosing billions as the government is still heavily involved, up to their neck, with AIG, Freddie Mac, Fannie Mae, Citigroup and others.

However, you have to give credit to the FED, the Treasury and the administration for apparently rescuing our financial system from itself. We are still not out of the woods. There are plenty of additional problems ahead. Particularly the foreclosure rate will only increase not decrease for another six months to a year and we are planting the seeds of inflation in this forest of problems. Inflation will be the result of too much spending which will drive down the value of the dollar. The dollar in the short term may strengthen but massive government spending in the past has always resulted in inflation. Yes, the economy is on the path to recovery but that path is not smooth.

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