With QE2 now in the books it’s pretty obvious that the policy did not generate the kind of growth that most assumed it would. In fact, there is substantial evidence that the policy did little aside from causing a margin squeeze on the entire economy. So while the end of year tax cut appeared like a great benefit to the economy, it was largely offset by the surge in commodity prices and the resulting reallocation of consumer spending.
We didn’t hear much of this bearish scenario last year when the policy was in full force, but now that it’s ending some banks are using the recent decline in commodity prices to make a bullish case. They were wrong to ignore the bump in the road that QE2 caused, but they’re correct in saying that the end of this policy will reduce the speculative premium in many commodity markets which should result in a boost to consumer spending.
In a recent note, UniCredit highlighted how the recent dip in commodity prices should begin to act as a delayed tax cut:
- At the end of last year, the US administration had hoped to kick-start flagging consumption through tax cuts. But the plan failed, as soaring commodity prices have in recent months absorbed not only the tax cuts but the entire increase in disposable incomes.
- Now, however, the tide appears to be turning. Energy prices have fallen strongly in recent weeks and might pull back even further. In addition, food prices have at least stabilised. That means that US households are now enjoying a (delayed) tax cut after all.
- Alongside the boost to purchasing power from falling commodity prices, the US economy will probably also receive support at the beginning of 2H from a rebound in auto sales. As a result, economic numbers in the coming weeks could surprise on the upside – the bounce, however, should only be short-lived.
This effect can best be seen in real disposable income which has sagged in recent months: