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Debt Deal Done: Now Worry About the Economy

It looks like there's a debt ceiling deal is in place, so near-term crisis averted, subject to Congressional votes. Now you can start to worry about the bigger issues plaguing the economy, like slow growth, weak jobs and dismal housing.

Perhaps you missed the news on Friday--the US economy is expanding at a snail's pace this year. The government said GDP in Q1 grew by only 0.4 percent (revised lower from the initial 1.9 percent estimate) and in Q2, by only 1.3 percent. The current recovery, which began almost exactly two years ago, has seen annual growth of 2.5 percent, less than half the 5.4 percent enjoyed during previous recoveries.

In the "tell me something I don't know" category, let me say again: this has been a terrible recovery. The job market is lousy, wages have been frozen for a decade and housing is still in the toilet.

As my colleague Carla Fried noted, the debt ceiling "crisis" was manufactured by Congress. In the past 50 years, the debt ceiling has been raised 78 times, 49 times under Republican presidents and 19 times under Democratic presidents, so why all of the sudden, in the midst of a tenuous recovery, did we need to see the latest example of legislative kabuki? As Carla astutely points out:

There was no need for this to be a crisis. Congress chose to make this a crisis. And in the process of tending to its own manufactured mess, it continued to ignore the real crisis that needs attention: the economy.
What will propel the limping economy? To figure out the answer, we need to see how the three engines of economic growth-consumers, government and corporations-are doing.

Consumers: Consumer spending in the second quarter was the weakest it has been in two years. The reason is obvious--consumers are busy paying down the mountain of debt they have accumulated over the past decade. At the end of 2010, US household debt totaled $13.4 trillion, or 107 percent of the $12.5 trillion Americans earned in total household income last year. Some analysts say that to return to the 1990's debt-to-income ratio of 84 percent, incomes would have to be $4 trillion higher. According to Credit-Suisse, that's likely to nine years!

Government: Beware what you wish for...the debt ceiling deal calls for $2.4 trillion in spending cuts over the next decade. Before you you get too psyched about that fact, consider that the massive government spending that occurred in the past two years was meant to fill the gap vacated by the beleaguered consumer. As the government pulls back on spending, there's likely to be a drag on growth going forward.

Corporate America: Here's the one bright spot in the economy -- companies are making lots of money. With just over 2/3 of S&P 500 companies reporting thus far, 72 percent have beaten estimates and Q2 earnings growth is up 18 percent from a year ago. This is great for investors, but hasn't done much for the economy. The money that companies have earned during the recovery has mostly stayed within corporate America and has not trickled down into higher wages or robust job creation. In fact, over the past ten years, a decade when the US economy has expanded by 19 percent and non-financial corporate profits have risen 85 percent, the number of private sector jobs has fallen by nearly 2 million. (See today's news of HSBC's 30,000 lay-offs
With two engines of economic growth running on fumes, we better hope that the corporate sector is firing on all pistons...and then some. Still feel good at about the debt deal? Me neither.

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