How Would Austerity Measures In the United States Impact Our Economic Growth?

cutting spending06/29/11: In the markets, as in life, there are no guarantees but everyone is entitled to their opinion. Here’s my opinion on the financial markets today.

The Nitty Gritty Details:

Early gains were pared slightly, but stocks held most of their opening gains in the early minutes of trading after a successful Greek parliamentary vote on austerity measures.  While all eyes remain on Greece, market participants do have pending home sales for May to digest following Tuesday’s mildly encouraging report on home prices.  Overseas markets are broadly higher, following the lead from Greece and the U.S., with particular strength in Germany and Japan.  Commodities are broadly higher for the second straight day, led by copper, silver, wheat and corn, although U.S. crude is up only marginally near $93.

Looking back at Tuesday, stocks rose for the second straight session on optimism that Greece would secure its next round of aid by passing austerity measures (which it did as expected this morning).  Markets have also been expressing confidence that the private sector would be involved in the next phase of the Greece solution.  Strong results from a global athletic apparel maker helped set the tone, sending stocks up over 1% on the day.  Energy topped the sector rankings in a more than $2 jump in crude, as all 10 S&P sectors finished higher.  Materials also produced solid returns on a broad-based commodity rally, while Consumer Staples was slowed by higher energy prices.

Around our financial planning services firm this morning, we were discussing four items that we thought would be of particular interest to our readers:

The Markets Broken Down:

1. What does austerity look like in the United States and what does that do to economic growth? Most of the plans being discussed to reduce the deficit in the United States target $2 to $3 trillion in deficit reduction over the next 10 years, although several of the plans target $4 trillion in cuts.  Based on projections of GDP over the next 10 years made by the Congressional Budget Office, those cuts would equal about 1 to 2% of GDP per year, so the cuts would be a significant, but not an overwhelming, drag on the overall economy.

2. And, speaking of austerity, what measures are they considering in Greece that are driving the protests? The measures approved today include tax increases, public sector wage cuts, and the privatization of 50 billion euros (or about $72 billion), in state assets such as the electric utility.  A second vote will be held tomorrow to implement the measures, with key sticking points expected to include the timing of the privatization.  Many protestors feel not enough is being done to bring wealthy tax avoiders to justice.  The spending cuts and tax increases would cost the average Greek household about one month’s salary.

3. We’re on Japan “bounce watch.” Japan’s industrial production, which fell by a record 15% in March, posted only a modest rebound in April (+1.6%), leading to concerns that the recovery from the earthquake was not proceeding as quickly as hoped in the world’s third largest economy.  In late May, signs began to emerge that suggested that the cleanup phase was ending and that the recovery and rebuild phase was proceeding.  This morning’s news that Japan’s industrial production increased by 5.7% in May (the strongest gain in 60 years) was further confirmation that Japan’s recovery and rebuild had accelerated.  What is important about this news is that it should help to ease global double-dip fears.

4. Global bank capital guidelines are less onerous than feared. The global Basel Committee on Banking Supervision provided more details on its capital requirement guidelines for systemically important financial institutions (SIFIs).  The Committee proposed these institutions deemed systemic risks to the global banking system (a.k.a. “too big to fail”) hold additional equity capital between 1 and 2.5% above the broadly required level of 7% previously outlined by the Committee.  This additional capital requirement is far below what some in the market had expected only a few weeks ago.

As always, email me here with your questions or comments.  I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.


Greg Powell, CIMA
Wealth Consultant


Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.

Because of regulation, comments have been turned off.


Schedule an appointment today!

Meet with us and begin planning your Better, Richer, Fuller® life.

Make an appointment

Subscribe to Our Insights

Every Monday & Thursday, our video blog gives you everything you need to know about the trends moving today’s markets with concise analysis.