Sunday, July 31, 2011

U.S. economic reality check

As the world looks on in amazement at the U.S. Congress’ process for addressing the August 2nd debt ceiling deadline, the U.S. Commerce Department, on Friday, reported that 2nd quarter GDP grew at a lower than expected 1.3% annual rate (1.8% was expected). Additionally, 1st quarter growth was reduced to 0.4%, from a prior 1.9% rate. (Note: GDP growth of 3% or more is needed to reduce the heightened levels of unemployment).

MY TAKE: While the poor GDP numbers surprised many Wall Street players, these unfortunate results likely affirm the broader view held on Main Street. This economic setback will increase tension in the polarized debate on how the U.S. addresses its financial challenges. In the short-term, a debt resolution will likely be reached by Congress and signed by the President consisting of vaguely defined multi-trillion dollars cuts, with details set by committees at a later date. In the longer term, hard choices are unavoidable in the areas of health care and retirement entitlement cuts and government downsizing. Winston Churhill’s view that "Americans can always be counted on to do the right thing...after they have exhausted all other possibilities" is facing a serious test. A more likely outcome is that clarity will remain elusive and can-kicking will continue.

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