A Ray Of Hope And Presage Of Failure

Yesterday, there were a couple of news events that, I think, were left for dead amid all the political news of the day. While the media have literally joined in on the 24/7 all-Obama coverage, significant things are happening on the economic front that are not being given the attention they should.

The first little piece of significant news was the fact that existing home sales rose by 6.5 percent (See Full Story). This was despite all forecasts of a drop in sales. This is important because it may be signaling that home prices and interest rates have come down enough for buying to start up again. But, more importantly, that number discloses that some form of mortgage lending had to have taken place in order to cause that level of buying to occur. This could mean that the actions by the Federal Reserve and the Bush Treasury Department have unfrozen some of the credit lending activity in this country. While the headline seems to almost undermine that good news by stating that prices fell by 13 percent, the fact that there was a sales increase can't be ignored. In the overall economic scheme of things, prices will continue to fall until the demand for home buying reaches a point where there is a shift from a buyers market to a sellers market. Then prices will increase. But, first things first. Buying needs to start up again in order for there to be any hope of price stability in the real estate arena.

While there was good news on the real estate front, there was a more disheartening piece of news that came from Caterpillar Inc., yesterday. Their profits tanked by 32 percent; despite significant sales increases in Latin America and Asia. The real losses were in the industrialized parts of the world like North America, Europe, and the Middle East and, finally, in the emerging economies of Africa (See Full Story).

But, more significant than the drop in sales was the announced layoff of 20,000 employees. That number says a lot about what Caterpillar sees happening in 2009 and beyond. Caterpillar is a heavy equipment manufacturer. Their equipment, supposedly, would be used in all these "infrastructure" stimulus plans that the Democrats/Obama are talking about. It doesn't matter if your digging a foundation for a wind turbine, or rehabbing an existing road or bridge or building a new one, Caterpillar heavy equipment and equipment from their competitors would be used in the process. However, with yesterday's announcement, it appears that Caterpillar isn't anticipating any great benefit from those Democratic plans. And, why? That's because the infrastructure part of the stimulus is too targeted to those few companies in this country who currently work our roads and bridges. The broader base of heavy equipment needs, i.e. in corporate expansion and in new home and retail construction, is not being addressed in the stimulus package. That's why!

As of now, there is an increasing amount of idle heavy equipment out there as companies don't expand and builders don't build new homes and office buildings. Companies involved in federally-sponsored infrastructure rebuilding will have access to all that equipment; by either buying it used or by leasing or renting it from our construction companies. As a consequence, there will have no need to buy anything new from the likes of Caterpillar. That's the reality of the infrastructure stimulus that the Democrats are hoping will kick start this economy. That is why I have always said that the planned stimulus package is too narrow in its scope to have any significant impact on our economy. We will continue to lose jobs on a broad basis because the broader market of things isn't being addressed. It appears we haven't learned a single lesson from the Great Depression and those worthless FDR WPA programs; or, from what happened to Japan in their fruitless efforts in infrastructure rebuilding resulting in a decade long recession.

The housing sales increase is a good sign but it might just be a short-lived respite from a continuing downward spiral. I just don't see anything in this Administration's plan to help the broader economy recover. And, as always (and for legal reasons*), this is just my opinion.

*Note: Expressing an opinion as fact can get you in legal hot water. This entire blog is intended to be an opinion or, sometimes, a form of satire. Facts are always pop-up linked to their source.

Caterpillar equipment image by terinea's photostream on Flickr with Creative Commons Licensing. Some rights retained. (Click to View Other Works).