The Fiscal Plight of the "Man on the Street"

An interesting thing happened last week. On Thursday, the government announced its “all important” GDP figures for the September quarter. The results bettered the Street’s expectations and promptly sent investors into a buying frenzy. The S&P 500 finished the day up 2.3%.

But by Friday, investors were scratching their heads with one hand…and hitting the “sell” button with the other. Apparently the “man on the street” is not doing so well…despite news that the economy around him is improving. Consumer spending was down 0.5% for the month of September, according to the Commerce Department, and the housing market is still floundering.

“[N]ew home construction is 74% below the peak it reached in January 2006,” reports Forbes. “The drop is far more dramatic than the 46% decline in 1981 and well ahead of the 60% fall between 1986 and 1991.”

There are now almost 20 million vacant homes in the United States. That’s a lot of inventory to move.

By close of trading Friday, investors had given back all of Thursday’s gains…and then some. How could this be?

“Don’t believe the GDP hype,” Dan Denning cautions from his post here in Melbourne. “The big problems in the economy – too much debt, too much leverage, too much government – are still there. They didn’t go anywhere overnight. We’d suggest that getting sucked back into stocks now because of the US GDP figure is a very bad idea.

“Of course, we could be wrong,” Dan continues. “Maybe stocks will go up another 20% from here. Or 30%. Or 50%. But it’s not likely. It’s more likely that the recession is over, but that the Depression has just begun.

“It’s begun because what the US GDP numbers actually show is a private sector in full retreat as its income shrinks, its assets fall in value and the cost of servicing debt rises. Into that terrible breach the public sector has stepped, armed with an arsenal of inefficient and stupid programs that give the illusion of economic activity, but actually prevent the economy from liquidating excess capacity and bad debt (the two conditions required for a real recovery).”