Supply and Demand About to Make a Comeback
August 24, 2009 by Miranda Marquit
Filed under Finance
Recently, some sectors have been benefiting from economic stimulus efforts. The housing and automobile industries have been the main recipients of economic stimulus money, and programs from tax credits for first time homebuyers to Cash for Clunkers have been helping demand. However, with economic stimulus programs coming to an end, it looks as though supply and demand could make a comeback.
This has been one of the worries for the economy. As stimulus efforts come to a close, it will become increasingly difficult to keep things running for some businesses. Additionally, banks have started lending a little bit more. But what happens when the mortgage lending dries up again at the end of the year when the government incentives run out? The credit crunch — especially for small businesses — is far from over and it could actually get worse again.
Encouragement from the government has been boosting demand, and when that demand falls, there are concerns about what may follow. Additionally, unemployment remains an issue, and that will likely affect consumer spending. Many retail sectors actually complained that Cash for Clunkers took money away from them, as customers chose to increase debt and decrease discretionary spending in order get new cars.
With consumers interested in saving again, it may mean another dip for the economy, since consumer spending accounts for about 2/3 of economic activity. It will be interesting to see how things progress going forward, and what sort of effect future moves will have on the bottom lines of many companies.
Image source: Steve Wampler via Flickr
Supply and demand never left the room. The Government programs have tried to jack up the demand side of equation, and to take the car example reduce the inventory of new cars so the assembly lines would start rolling out more new cars. Once the artificial stimulus is withdrawn, organic demand could fall lower than pre-stimulus levels since the stimulus simply moved future demand into the current period. Keynesians would argue stimulus changes the psychology of the marketplace and increases organic demand as a by-product. However, if consumers are still uncertain about the future their priorities may be paying off debt and building up an emergency fund to be bettered prepared for the unexpected.