Lacy Hunt and Van Hoisington of Hoisington Investment Management do not exactly get us off to a hopeful start in their third-quarter review, today’s Outside the Box:
The worst economic recovery of the post-war period will continue to be restrained by a consumer sector burdened by paltry income growth, a low and falling saving rate, and an increasingly restrictive Federal Reserve policy. Additionally, with the extremely high level of U.S. government debt and deteriorating fiscal situation, the economy is unlikely to benefit from any debt-financed tax changes. Finally, from a longer-term perspective, the recent natural disasters are an additional constraint on economic growth.
Having set the stage for this rather dark and doomy tale, our intrepid authors launch into a blow-by-blow exegesis of the role the beleaguered consumer has played in keeping the economic beast on its feet and slowly stumbling forward.
We consumers account for two-thirds of US GDP, they remind us. And “Consumer spending is funded either by income growth, more debt, or some other reduction in saving. Recent trends in each of these categories, as outlined below, do not bode well for this critical sector of the U.S. economy.” I’ll let Lacy and Van fill in all the gruesome details.
But they bring up the point – and do it mathematically and in depth – that I made in last week’s letter: The Federal Reserve is embarked upon an extraordinarily dangerous course as it both raises rates and reduces its balance sheet.
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