Monday, May 6, 2013

The Future is So Bright, I Gotta Wear Shades

We have been facing two powerful and counteracting economic forces in the last couple of months.  The negative force has been the cuts in government spending resulting from sequestration, the end of the stimulus funds and cuts in state and local government budgets.  This has been accompanied the expiration of the payroll tax cut in January.  The payroll tax increase is a powerful negative stimulus since the gains from the tax cut mostly went to high spending low and middle income families.

The counter-acting force has been a revival of the animal spirits of capitalism.  Business confidence has shot upward and firms have begun to increase investment and hiring after four years of stagnation. This may have started out as the result of pent-up demand in household formation, inventories and aging equipment.  But the good news is that these forces have revived the animal spirits of capitalists.  Companies who were sitting on cash waiting for more certainty in the future, seem to believe that the future is bright.

Right now, the more powerful force is the animal spirits.   The media will take a long time to adjust to reporting good economic news.  The economic story has been bad economic news for so long, analysts will have trouble making the shift to a different mentality.  But eventually, the conventional wisdom will shift and the recovery may actually begin to accelerate.