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Stimulus plan produces two bright spots

- The Washington Times - Tuesday, July 14, 2009

As debate rages over the impact of the $787 billion stimulus bill, a pair of relatively inexpensive programs that passed more as afterthoughts than as stimulus are having the most immediate impact on the economy, contributing to an expected rebound in growth this summer.

While much attention has focused on the lion's share of funding that was aimed at maintaining spending on education, health care and infrastructure by the states, the provision that has been most visibly helpful is the $8,000 homebuyer tax credit, an afterthought to the bill that has helped to steady the housing market by spurring sales of foreclosed and low-priced homes to first-time homebuyers.

Similarly, legislators who failed to include provisions to help the foundering U.S. auto industry in the original stimulus bill in February offered belated aid last month by passing a $1 billion "cash for clunkers" program that also is likely to provide a one-time boost to economic output this summer.

The combination of these two seemingly modest provisions has prompted some economists to project that the economy will enjoy at least one quarter of growth this summer.

"Housing and motor vehicles are showing a faint pulse," said Richard Berner, chief economist at Morgan Stanley, adding that observers may be surprised at how strongly the two most depressed sectors of the economy spur statistical measures of growth in coming months. He sees the economy growing at a modest 1 percent annual rate in the summer quarter after falling by 1.5 percent in the spring quarter.

"Housing is getting support from the first-time-homebuyer tax credit, the lagged effects of lower mortgage rates, and home-price declines," he said. Buyers with modest incomes, in particular, have been able to use the credit as a substitute for cash savings to cover down payments or closing costs because Congress made it so they can get a check from the Treasury even if they don't pay taxes.

The National Association of Realtors also attributes the resurgence in home sales among modest-income and first-time buyers to the homeowner's tax credit, which along with the plunging prices resulting from massive foreclosures has made homeownership affordable again for these groups.

Housing sales and construction starts have bottomed out since the homebuyer credit was enacted, and Mr. Berner said he expects "further small gains" in the months ahead.

The cash-for-clunkers bill, which provides people who buy a new car to replace a gas-guzzler with up to $4,500, will have a more limited effect, he said. But because the cash is available only between July 1 and Nov. 1, it likely will cause a temporary surge in auto sales during the summer as buyers respond to the "use it or lose it" incentive.

The rebound in sales will coincide with an expected rebound in production and employment at two of Detroit's Big Three automakers -- General Motors and Chrysler -- which recently emerged from bankruptcy. That production rebound also is expected to contribute to a revival of growth in the summer.

Automakers are starting up production again not only because they are out of bankruptcy but because inventories of autos have been drawn down to the point that shortages of some popular models are emerging. That mirrors a trend in other sectors, where a long period of selling off bloated inventories of goods since last year has produced lean stocks that now must be replenished by starting up production again.

Harm Bandholz, economist at Unicredit Markets, said he expects the economy to post a 2 percent growth rate in the summer quarter, thanks to the rebound in inventories, the one-time boost from the clunkers program, and the beginning of effects from stimulus spending on infrastructure projects.

But he worries that these helpful elements will not last, and the economy will fall back toward anemic growth or recession again after a couple of quarters of growth. His principal concern is that consumers -- who normally fuel 70 percent of economic growth -- will not be able to sustain a recovery because they are still losing jobs and income despite a modest boost they received recently from federal tax cuts and income transfers in the stimulus bill.

The nearly 50 million consumers who received one-time $250 Social Security checks in May and June appear to have largely saved the money, economic reports show. And the $50 billion boost for middle-class taxpayers from President Obama's Making Work Pay tax credit, which went into effect in April, has been largely offset by a comparable increase in gasoline prices during the same time, economists say.

The result is, despite some help from the stimulus, consumers have little power to overcome the effect of job losses and become the engine of growth in the economy again, Mr. Bandholz said.

Nigel Gault, U.S. economist at IHS Global Insight, said he expects consumer spending to remain weak despite the one-time boost from the stimulus bill.

"Government transfer payments and tax cuts are propping up incomes, as the fiscal stimulus package kicks in, and they are preventing more damage to consumer spending," he said, estimating that the stimulus payments accounted for nearly all of a 1.4 percent increase in personal incomes in May and drove up the savings rate to nearly 7 percent.

"But as night follows day, incomes will decline in June as the one-time payments drop out, and the saving rate will drop back as well," he said.

Beyond the homebuyer credit, clunkers program and a few other provisions, economists are not enthusiastic about other provisions of the stimulus bill. Many note that most of the bill was aimed at merely maintaining current levels of taxes and spending by unemployed people and the government, which does nothing new to boost the economy or create jobs.

Standard & Poor's managing director, William Montrone, notes that states have mostly used the $200 billion they received to "plug significant budget holes rather than create new spending programs" that might prompt more hiring.

"The problem is one of timeliness and bang for the buck," said Morgan Stanley's Mr. Berner. "It is heavily backloaded and full of spending unlikely to be stimulative."

Martin Weiss, president of Weiss Research, notes that "the actual flow of funds from Washington is often puny in comparison to the powerful events unfolding in the real economy." The estimated $50 billion of stimulus funds that so far have filtered into the economy has been largely overwhelmed by the cutbacks in production and jobs at Chrysler and GM, he said.

Still, most economists say the sheer size of the stimulus -- more than five times larger than a tax-rebate bill that helped produce a quarter of economic growth last year -- means it almost certainly will help spawn a recovery of growth in the second half of the year, when most of the spending provisions are expected to kick in.

"A rebound in 'high-beta' areas of consumer discretionary demand such as housing will occur, aided by fiscal stimulus," said Bill Greiner, chief investment officer at Scout Investment Advisors.