South By North Strategies, Ltd.

Martin Feldstein doesn’t like the odds of the American recovery running out of steam.

Recent US data have clearly raised the probability that the economy will run out of steam and decline during the next 12 months. The key reason for increased pessimism is that the government stimulus programs that raised spending since the summer of 2009 are now coming to an end. As they have wound down, spending has declined.
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The government programs failed to provide the “pump-priming” role that was intended. They provided an early spark, but it looks like the spark did not catch. For example, a tax subsidy for car purchases caused GDP to rise in the third quarter of 2009, with more than two-thirds of the increase attributable to motor-vehicle production. But now that the subsidies have ended, the level of both sales and production has declined. A recent survey of consumers reported the lowest level of intended car buying in more than 40 years.
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The second quarter benefited from a surge in home purchases, as individuals rushed to take advantage of the tax subsidy for home buyers that expired in April. But what will happen in the third quarter and beyond now that that program has ended?