Economy's Woes May Drag On

09/13/2010 10:55 am EST

Focus: MARKETS

Mary Anne & Pamela Aden

Co-Editors, The Aden Forecast

Pamela and Mary Anne Aden, editors of the Aden Forecast, say unemployment and weakness in housing may keep the economy down for quite a while.

The economy has been faltering. GDP in the US grew [only] 1.6% in the second quarter. The jobless recovery remains jobless, raising the question [of whether] this has been a recovery after all.

We know it was driven by government stimulus and now that most of the stimulus has been used up, the economy is having trouble making it on its own. This raises another question: can it? Based on the evidence, it doesn’t look like it.

Jobless claims have been climbing, hitting an eight-month high. Without jobs, people can’t spend, make their payments, or buy a house—and the numbers this month were eye-opening.

Home sales plunged 27% to a 15-year low, and mounting foreclosures were largely to blame. There [are] simply too many houses on the market, which drives sales and prices down. In fact, new home sales reported [their] slowest month in nearly 50 years.

This shows that...the housing market...was being propped up by the housing [tax credit], and once it ended, housing continued on its downward path.

Remember, housing has led the way out of recessions in seven out of the last eight cases. So, this is either one of the exceptions, or the economy is still in trouble. And again, the evidence is leaning on the “trouble” side.

Concern has been growing that the economy’s headed for a double-dip recession, or outright deflation. And the [Federal Reserve] is concerned, too. It’s gone back to saying that it’ll do whatever is needed to boost the economy to keep it from slumping, and it’s starting to take action.

The Fed recently began buying more US government debt in the hope of keeping the economy afloat, and they’re ready to do a lot more. In other words, the Fed has said many times they’re not going to let the economy go down the drain.

While we obviously don’t know what the Fed is thinking, we can see what they’re doing. They know what worked before: spending and stimulation. And if it worked before, it’ll work again.

So, if more debt, a bubble here and there, a weaker dollar, and eventual inflation are the inevitable results, then that’s the way it’ll be. There’s really no other choice, because the alternatives are unimaginable. By their actions, the Fed has shown time and time again that whatever the ultimate consequences, they’re better than the alternatives.

Many argue [to] let nature take its course—let the markets correct their excesses, pay the price, and then move on. This is fine from an academic viewpoint, but the government doesn’t work that way.

Increasingly, over the decades, it feels it has an obligation to “fix things.” That’s what [most] voters expect and that’s what the government does. Socialistic? Yes, but it’s been that way for a long time, and we don’t see this changing any time soon.

Subscribe to the Aden Forecast here…

Related Articles on MARKETS