By Jim Haughey, Reed Construction Data

The economy has lost the growth momentum it had for almost a year. This was not unexpected and is not unusual at this stage of a recovery.  The huge pump-priming efforts in 2009 could not be sustained because they did not generate enough income to pay for their extension.  The $26 Billion in new stimulus money that Congress added earlier this week is far too small to sustain the 2009 payments to public employees and those who do not work or earn very little. These cutbacks in the public sector have been quickly matched by private market cutbacks to avoid accumulating unwanted inventory.

So we are back again on the wrong side of an inventory cycle just as we were in the last half of 2008 and the first half of 2009. Fortunately, this cycle should be quite short and mild with production gains resuming in the fall. But until then the economy is very vulnerable.  Any bad news for consumer or business buyers could deepen and lengthen the inventory cycle with magnified consequences for construction spending.

There was concern earlier this year that both the southern European deficit crisis and the resulting austerity programs and the Chinese government policies to slow an overheated economy could spillover into reduced US exports and hence slower economic growth. Both of these remain concerns but so far have had little negative impact.  In Europe interest rates for troubled public debt have retreated from panic to concern levels.  Credit Germany’s willingness to shoulder much of the burden of bad debts for this.  In China, the slowdown has been gradual and orderly. This is because the nominally centralized economy is in fact so decentralized that Beijing’s edicts are often ignored. Both of these threats to US economic growth remain but they are no longer immediate.

It turns out that the slowdown in the US recovery is largely due to domestic problems. The federal fiscal stimulus, while huge, was ill designed.  It was very slow and focused on stimulating spending that generated relatively little second round spending in the private economy.  This is the prime cause of the late spring economic slowdown.  Federal fiscal stimulus is ebbing, forcing layoffs, consumer spending cuts and hence investment cuts.

Set aside whatever you think is the government’s proper role in income distribution. The variety of federal stimulus programs were ill designed to quickly generate jobs, investment and sustainable GDP growth. The Obama plan has three faults.  First, much of the expenditure had to go through a lengthily bureaucratic process before checks were written.  This delayed spending.  Much of the $862 Billion has yet to be committed after eighteen months.

Second, most of the federal pump priming money was spent on items that taxpayers refused to fund in better economic times.  The money went to adding public employees and giving them raises, paying for the medical costs of people without employer based insurance and building and repairing public facilities that had failed to get funded previously.  These expenditures did not produce and goods or services that consumers would voluntarily buy.  Little, if any, taxes were generated to pay for extending these programs when the original funds were exhausted.

Third, the federal pump-priming programs were accompanied by mean spirited words blaming the country’s economic problems on the greed of wealthy people and business managers.  They were threatened with tax increases and higher costs for healthcare, financial services and energy.  They saw GM and Chrysler investors get wiped out to provide funds for retiree health costs.  Now BP investors fear being wiped out by a huge fine paid to the federal government and billions paid to pick up beach tar balls with garden rakes. Unfortunately for economic growth, these people who have been frightened by what they hear from Washington control most of the spending in the economy, both household and business budgets.

As a result, buyer confidence has declined a year into the recovery period.  Previous federal fiscal stimulus programs were more effective at far less cost because they gave people who control most of the spending a reason to be optimistic not pessimistic. The Bush $500 rebates in 2008 were done without any threats of higher taxes or costs to people who received them.  Compare this to the 2009 Obama rebates.  The people who control most of the spending were excluded from getting the rebates, told they were responsible for the country’s problems and told to expect a tax increase instead. This did not make them comfortable spending money, at home or at work. Spending confidence remains at a recession level.

The baseline outlook is still for the economy to muddle through the summer, flirting with zero growth, and resume a 2-3% growth pace later in the year.  This permits construction spending to begin slow but sustained growth around yearend. Remember that this is the election season. You will hear some outrageous claims and threats about the economy from both the “ins” and the “outs”. Economic growth trends develop gradually. There are no signs now of either a collapse in the recovery later this year or an abrupt return to above average growth.