The Global Radar Screen 9/9/11

Posted September 13, 2011 by CLeahey

[private][private]Overview—Scotty, Give Me More Stimulus! The 2008/09/10 Plans Aren’t Enough!

Investors have a strong sense of déjà vu now that Obama announced yet another stimulus package. It is hard to forget how excited analysts (and equity investors) got talking about the 2010 plan, with growth of 4% bandied about as likely. It didn’t happen, in part because most of the 2010 stimulus went into the gas pump. Now some prominent analysts estimate a 2 percentage point boost to GDP growth which could make the 4% growth target possible again. But investors won’t be burned twice and are incorporating smaller changes to their GDP and earnings outlooks. Many may have already factored-in much of Obama’s package into their existing forecasts, such as the extension of the employee payroll tax cut or the extension of unemployment insurance benefits. In addition, even though the proposals are familiar and enjoy bipartisan support, not all will be adopted by Congress, making the package potentially much smaller. If the package is paid for immediately with offsetting outlay cuts or tax increases, the simulative powers become very small. Finally, with expectations so depressed among households and small businesses, many forecasters will be prudent and argue Obama’s plan will only solidify their existing forecasts. We would be surprised if many analysts put GDP growth above 3.5% in 2012, a pace that might be as much as 1 percentage point above where they were before the speech. But it would be hard to carry much less than 2.5% to 3% growth next year which is a lot better than 1% to 2% many worry about. Unfortunately, for Obama, who is trying to keep his own job next year, even 3% GDP growth might not lower the jobless rate very much. Even an “8” handle on the unemployment rate would normally scuttle a sitting president’s reelection chances. Obama may be saved if the Republicans put up their own ideologically pure version of George McGovern, who got only 38% of the popular vote and a meager 17 electoral votes in 1972. The more the Republican candidates talk about dismantling popular programs like Social Security and Medicare, more likely the candidate who energizes the Republican “base” is less likely to become president.

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