Nomura’s Richard Koo is back, and he’s still no optimist, even with most data showing improvement.
On the state of the US economy, he writes:
Are favourable US economic data only temporary?
One view is that the recent strong economic data are a temporary phenomenon and, as argued in my last report, are attributable to pent-up demand. I think this is true to a certain extent in the case of automobile sales, for instance.
According to this view, people who put off buying a new car after the property bubble collapsed have finally decided to replace their existing vehicles after seeing the economy stabilise and deciding that their jobs would be safe.
Others argue that supplies of auto parts and automobiles interrupted by the earthquake and tsunami in Japan last March are now flowing again. They say the resulting pickup in the economy will wind down once this pent-up demand works its way through.
And he also discusses the meme that in 2013, things will go to crap thanks to the fiscal cliff:
Bernanke warns of “fiscal cliff” on 1 January 2013
According to Chairman Bernanke, inflation-adjusted income and wealth, which are critical to final demand, did not increase at all in 2011. Consumer confidence also remains depressed even though it has recovered somewhat from the depths of last summer.
The Beige Book also notes that government-related spending has decreased in many districts as the fiscal stimulus measures unveiled by President Obama in February 2009 expire.
Concern over this point prompted Mr. Bernanke to remark that something had to be done about the
“fiscal cliff” on 1 January 2013. That day brings not only the expiry of a number of tax cuts but also the enactment of mandatory spending cuts agreed to last August.
That would mean the loss of a major support for the US economy. Unless some other source of support has emerged by then we would risk a sharp economic downturn.
As the Fed is responsible for monetary policy, its chairman customarily refrains from commenting on fiscal policy. The fact that Mr. Bernanke used the strong expression “fiscal cliff” to warn about 1 January 2013 underscores his understanding of the importance of fiscal stimulus to the US economy today. The term cliff implies that everything would be lost in a fall and highlights the extent of the Fed chairman’s concern about this scenario.