Saturday, September 17, 2011

The ‘New Normal’ Doesn’t Have To Be Slower Growth!

Popular Economics Weekly
There is no reason to accept what pundits and some economists are telling us we have to accept—a ‘new normal’ for economic growth that is some kind of growth recession. Because we have the means to spur sufficient economic growth, if only we will reject an insidious disinformation campaign that discredits all scientific and factual reality, a campaign that can only work if we listen to those who would blame others for the Great Recession—and who blame immigrants, the budget deficit, too much government, or too high taxes in order to justify further spending cuts.
A growth recession is what the Japanese have experienced ever since their twin real estate and stock bubbles burst circa 2000, because they didn’t cure the ills that caused their bubbles, or spend what it took to revive their economy until it was too late to prevent more than a decade of deflation and poor economic growth sound familiar?).

Graph:  Trading Economics

So don’t believe the scapegoaters for a minute. We need more job creation programs, not tax and spending cuts, because corporations are holding onto their record profits generated by laying off domestic workers while sending jobs overseas, so that 50 percent of S&P 500 corporation profits now come from overseas operations. And consumers aren’t spending enough to cause domestic expansion because their incomes aren’t rising, even though they produce more per worker.
The ‘new normal’ of growth we are currently seeing is really a product of the so far successful Republican campaign to oppose any kind of stimulus spending. But they can only do this by dumbing down the electorate or (at least their own constituency) that believes austerity is more important than job creation, that cutting taxes for the richest is more important than repairing our aging infrastructure, or protecting the environment, or even maintaining social security and Medicare.
The Republicans answer to Obama’s $447 billion job formation bill was predictable. House Majority Leader Boehner said long term tax hikes should not pay for short term stimulus, which is not being truthful. The tax hikes are paying for long term jobs—in infrastructure, education and environmental protection. And the tax hikes on itemized deductions for the wealthiest 2 percent would cut some $400 billion from the deficit over the next 10 years, since those tax breaks are being paid for with borrowed money. Another $62 billion of the deficit would be cut by eliminating the various tax breaks on oil and gas, private equity partners, and corporate jets.
Republicans are, in a word, trying to convince us what is in effect a ‘new normal’ of ignorance, a wholesale ignorance of reality based facts—whether economic or scientific. For instance, how can anyone believe Republicans who maintain Obama’s stimulus spending created zero jobs, when the CBO says it created or preserved 1.4 to 4 million “Full Time Equivalent jobs to date? Or Rick Perry’s blatant untruths about social security being a “Ponzi scheme”, global warming not having a scientific consensus when his own Texas is burning because of a record drought, and evolution is just one competing theory?
Their campaign is insidious, as the discounting of facts does appeal to their base of support on the extreme religious right. They have to keep their electorate ignorant, if they want to transfer even more wealth to Wall Street by privatizing social security while advocating deregulation when that is what caused the market crash.
Republican House Whip Eric Cantor tries to justify his opposition to paying for the jobs bill by saying it’s a tax on the “job creators”. But the only job creators will be government tax dollars returning to the private sector to create more private sector jobs, when the private sector isn’t hiring.
And social security and Medicare are really only in danger of running out of funds if Republicans and their conservative backers won’t support the actual reduction of federal debt, rather than keep the tax cuts and loopholes that have transferred so much wealth to the wealthiest, and continue to oppose regulations that would lower health care costs. As a result corporate profits are now highest in history as a percentage of GDP, as we have said.
A growth recession is not what we want. The Japanese are bedeviled by debt that is now 200 percent of GDP, as they have allowed deflation and a cheap currency to facilitate exports, but has suppressed domestic demand—mainly because such a deflationary spiral means their citizens’ wealth continues to decline.
There are other reasons for Japan’s economic decline—reacting too slowly to the bubbles and so choosing austerity instead of pump priming (sound familiar?), static population growth (because of immigration restrictions), and a keiretsu economic system of interlocking ownerships that has banks owning aging corporations they kept afloat too long rather than putting money into new growth opportunities.
But there is no reason we should follow Japan’s example. Instead, we have to turn back 30 years of conservative attempts to shrink government with a vengeance that has not really transferred wealth to the private sector—except to their wealthiest supporters. But it will take the growing anger of the unemployed and under-employed to accomplish it—such as happened with Wisconsin’s public workers—rather than angry Tea Partiers blaming welfare immigrants and the lazy jobless for budget deficits that are only growing because of the disinformation campaign that attempts to dumb down voters.
Harlan Green © 2011

Monday, September 12, 2011

Consumers Continue to Spend—What Pessimism?

Financial FAQs

Consumers continue to spend, in spite of the doom and gloom of the latest confidence surveys and high unemployment rate.  This is confirmed in part with July’s outstanding consumer credit numbers, as well as a robust service sector.  Overall consumer credit advanced $12.0 billion in July, following an $11.3 billion boost the prior month.  But the latest increase was due to a solid gain for auto sales in July as nonrevolving credit rose $15.4 billion. Nonrevolving credit has now risen for 11 straight months.


In contrast, gains in revolving credit, reflecting credit-card use, have been hard to come by with the component down $3.4 billion in July to end a short run of strength. Consumers continue to deleverage credit card balances and banks are still writing off bad credit card debt though at a slower pace.


The good news is that consumers are still spending—but increasingly with cash, says Econoday.  Retail sales excluding autos hit a recent bottom of $278.9 billion in March 2009 and for July 2011 posts at $323.6 billion—a cumulative 16.0 percent rebound.  Keeping the plastic in wallets has slowed retail sales growth but it likely has been necessary to strengthen consumer balance sheets that had become way out of balance with debt.  Until job growth picks up, consumers will likely be reluctant to take on more debt and sales growth will remain moderate.  And importantly, sales growth is possible even without the plastic.


And service sector growth, which now makes up two-thirds of economic activity, is also holding in the ISM non-manufacturing report.  The Institute For Supply Management’s non-manufacturing composite actually edged 0.6 points higher to 53.3, when anything above 50 means expansion.  This was a sharp contrast with a number of regional surveys that had turned negative. It also topped market expectations for a reading of 51.1.

The debt-ceiling drama and the S&P downgrade of the US did in fact pull down consumer confidence which fell in August to 44.5 for the lowest reading since April 2009. Weakness was concentrated heavily in the leading component which is expectations where the consumer's outlook on employment, business conditions and on income all fell. The expectations index, at 51.9, is also at its lowest level since April 2009.


This hasn’t stopped consumer spending, as I said, which rebounded a sharp 0.8 percent after slipping 0.1 percent in June.   By components, durables jumped 1.9 percent after declining 1.1 percent in June.  Clearly, motor vehicle sales are up as the supply constraint related parts shortages from Japan is easing.  Nondurables increased 0.7 percent, following a 0.5 percent decrease in June.   Services rose 0.7 percent after nudging up 0.1 percent in June.   The latest numbers on spending should allay concern about a double-dip recession—even with the latest jobs report.


This should put double-dip fears to rest. The current fears have more to do with Europe’s problems. And if President Obama fights for his new $447-billion jobs plan, then the fears will be confined to Europe, which still believes that austerity is the way to prosperity. But given the latest zero job growth numbers and public discontent with the current ‘do nothing’ Congress, US politicians might finally be convinced that creating more jobs is the path to prosperity.

Harlan Green © 2011

Thursday, September 8, 2011

Where is Harry Truman When We Need Him?

Popular Economics Weekly

The U.S. economic outlook has "clearly" deteriorated this year, and the continued softness of economic indicators shows that the headwinds facing the country are even stronger than thought, Chicago Federal Reserve President Charles Evans said last Wednesday.

"Conditions still aren't much different from an economy still in recession," said Evans, speaking at a seminar in London.

Is there something we can do about it with our Accommodator-in-Chief giving conservatives what they want, such as cancelling the new air quality regulations, without negotiating for something in return? Well yes. Bring back another “Give ‘em hell” Harry Truman, or have President Obama choose him as a model for how to weather the next year during an election season, instead of the “Give ‘em what they want” Barack we have known of late.

“Give ‘em hell” Truman was given that nickname for a reason. During a 1948 campaign speech a supporter yelled out "Give 'em Hell, Harry!". Truman replied, "I don't give them Hell. I just tell the truth about them and they think it's Hell."

The post-WWII economy was going through the same malaise as today. Federal debt had ballooned to 120 percent of GDP to pay for WWII (vs. 80 percent today), unemployment was high, and Republicans crying deficit reduction had triumphed in the 1946 Congress.

"Republicans stand four-square for the American home--but not for housing,” he said during his 1948 campaign. “They are strong for labor--but they are stronger for restricting labor's rights. They favor minimum wage--the smaller the minimum wage the better. They endorse educational opportunity for all--but they won't spend money for teachers or for schools. They think modern medical care and hospitals are fine--for people who can afford them. They consider electrical power a great blessing--but only when the private power companies get their rake-off. They think the American standard of living is a fine thing--so long as it doesn't spread to all the people. And they admire the Government of the United States so much that they would like to buy it."

Does all this sound terribly familiar, even to the Republican attacks against him?

“The smear campaign on your President started in all its vile and untruthfully slanted headlines, columns, and editorials,” said Truman. “Hearst’s character assassins, McCormick-Patterson saboteurs all began firing at me, as did the conservative columnists and radio commentators. Not because they believed anything they said or wrote, but because they were paid to do it.”

Truman was following one of FDR’s more well-known maxims: “Human kindness has never weakened the stamina or softened the fiber of a free people. A nation does not have to be cruel to be tough.” Truman and the Democrats were alone in trying to keep the U.S. economy afloat, in other words. So instead of compromising with deficit hawks by cutting spending, he blasted the “do nothing 80th Congress of that time”, advocating Universal Health Care and extension of unemployment benefits. When the deficit hawks in Congress voted down those benefits—both ‘blue dog’ Democrats and Republicans, we might add—he was able to blame them for the continuing malaise. Then he upset heavily favored New York Governor Thomas Dewey in 1948—it was one of the most famous comebacks in Presidential history.

“I have told the people that there is just one big issue in this campaign and that’s the people against the special interests. The Republicans stand for special interests, and they always have. The Democratic Party, which I now head, stands for the people–and always has stood for the people.”

Why is this malaise dragging on so long? With some $2 trillion in cash sitting on S&P 500 corporations’ balance sheets, and profit margins the highest since WWII, employers are refusing to hire more workers. This is why there was zero (0) nonfarm payroll growth in August.


It’s because businesses have been living in a bubble they are reluctant to leave. It is called supply-side economics, because of a succession of business-friendly administrations that believed the bulk of government benefits should be directed to business, rather than consumers. This was mainly in the form of tax breaks, which are of little benefit to consumers—most of whom pay a payroll tax that has never been cut. Business tax breaks are an indirect form of government support, but nevertheless result in reduced revenues.

Yet consumers have been spending more as wages and salaries—80 percent of the workforce—are rising; have been rising in fact since July 2009, the nominal end of the Great Recession. Consumer spending rebounded a sharp 0.8 percent after slipping 0.1 percent in June.   By components, durables jumped 1.9 percent after declining 1.1 percent in June.  Clearly, motor vehicle sales are up as the supply constraint related parts shortages from Japan is easing.


So what is the lesson from “give ‘em hell, Harry”? Truman was not afraid to take on those who wanted to reduce government, when government was the only support for both businesses and consumers during tough times.

“People are waking up that the tide is beginning to roll, and I am here to tell you that if you do your duty as citizens of the greatest Republic the sun has ever shone on, we will have a Government that will be for your interests, that will be for peace in the world, and for the welfare of all the people, and not just a few.”

So the Obama the Accommodator has to turn into Obama the fearless Negotiator who is willing to attack his enemies, who are also the enemies of the majority who have been hurt most by the Great Recession.

Harlan Green © 2010

Wednesday, September 7, 2011

Why the Terrible Payroll Report?

The Labor Department’s (BLS) August unemployment report showing ZERO (0) nonfarm payrolls growth was a shocker, when seasonally adjusted. Though expectations were low, no one had predicted absolutely no increase in hiring. But wait a minute. Aren’t 4 million jobs created and 4 million jobs lost on average every month, according to the Labor Department?

Ah, there’s the rub. When Labor “seasonally adjusts” the jobs’ numbers it is really counting any increase or decrease over normal hiring for that season, as we’ve said in past columns. For instance, during the summer months, since it finds a seasonal increase of approx. 1 million jobs from youths entering the labor force, it subtracts that 1 million from any actual increase in hiring before calculating the final Household survey increase or decrease via algorithmic formulas. This is while Establishment survey of nonfarm payrolls seasonal adjustment actually added jobs in August, as education payrolls can decline as much as 20 percent during the summer months, necessitating adding a seasonal adjustment factor.


We see more with JOLTS, the July BLS Job Openings and Labor Turnover Survey (It lags by one month), which shows the actual job totals. The number of job openings surprised us by climbing to a new cyclical high of 3.228 million positions, and the quit rate was a little higher than expected with 1.95 million workers voluntarily leaving their jobs for other opportunities. However, the number of new hires in the month slipped back to a six month low of 3.984 million, suggesting slightly less dynamism in recent months, said Wrightson ICAP. So employment numbers are at best an estimation, and can be the elephant in the room when attempting to predict future economic activity. In fact, the BLS itself says that it can only be 90 percent to get within 100,000 of the real numbers!


Chart: Wrightson ICAP

Since the seasonal adjustment is never very accurate it keeps getting adjusted when the more accurate state initial unemployment insurance claims come in. For instance, July’s payrolls were adjusted downward from 117,000 to 85,000, and June dropped from 46,000 to 20,000 net nonfarm payroll jobs. And Barron’s economist Gene Epstein mentions that as many as 75,000 private payrolls jobs might have been lost by the (just settled) Verizon strike in August.

And both the service and manufacturing sectors are showing more strength in August. An unexpected one-point increase in orders contributed to an unexpected rebound in the ISM non-manufacturing survey. The 0.6 increase to 53.3 was small but surprising nonetheless. The employment index fell by less than one point to 51.6, which, over time would be consistent with somewhat stronger payroll growth than was reported on Friday.


Chart: Wrightson ICAP

The overall business activity index, which is the most subjective component, slipped just half a point to 55.6. That index remains a couple of points above the recent lows reached in the April-June period, and suggests that the non-manufacturing sector does not see signs of an imminent collapse.

Another indicator arguing against a double dip is the Chicago Purchasing Managers Index. Business in the Chicago area this month did not slow as much as expected with the purchasers' index coming in at 56.5, down only 2.3 points from July. August's rate is comfortably over 50 to indicate solid growth in the area's economy though at a slightly slower rate than July. Chicago's sample, which includes both non-manufacturing and manufacturing firms, is considered a good proxy for overall GDP growth.


Econoday reports it shows solid but slowing growth for new orders and production. The new orders index rose to 56.9, compared to 59.4 in July. Production came in at 57.8, down from 64.3 in July but well over breakeven. Supplier deliveries slower substantially which is a sign of strong business activity. These results were surprisingly solid given the run of negative indications on August business conditions that included extremely weak readings on consumer spirits and a run of regional manufacturing reports reporting contraction.

Why aren’t more jobs being created? Corporations with a $2 trillion cash hoard and record profits aren’t the problem. They would hire more if they could sell more. So additional demand has to be created by financing additional projects that create private jobs, like rebuilding our aging infrastructure. The American Society of Civil Engineers has calculated that the deferred maintenance of our public transportation system alone will cost $2 trillion to bring up to modern standards.


Inflation also isn’t the problem. The 10-year Treasury bond yield is now under 2 percent. And Nobelist Paul Krugman said recently there are only 2 numbers that tell us what we have to do to grow the economy. The record low yield of the 10-year Treasury Bond, and 0 net nonfarm payroll growth in August. So the problem at the moment is the lack of political will in Congress to create more jobs, not the private sector who would certainly hire more workers if they had work for them.

Harlan Green © 2011

Friday, September 2, 2011

Labor’s Day—Have We Forgotten What It Means?

Popular Economics Weekly

It’s officially the end of summer, start of school, fall colors, and Obama’s upcoming September 8 joint congressional State of the Jobs Market. With the labor market in dire straits, what can we say about this year’s Labor Day Holiday?

Former French Finance Minister and new IMF Managing Director Christine Lagarde gave a highly regarded speech at the Fed’s Jackson Hole conference that said in effect this was the wrong time to implement more austere, budget cutting policies with labor in such trouble. “In the United States, policymakers must strike the right balance between reducing public debt and sustaining the recovery—especially by making a serious dent in long-term unemployment,” she said.

But the latest data on record corporate profits tells us something alarming. Because of the globalization of technology, businesses know how to expand without hiring more employees—at least in this country. About 83 percent of S&P 500 companies have beat second quarter 2011 analyst estimates according to data compiled by Bloomberg News. This is while S&P recently reported that in 2010, 46.3 percent of all S&P 500 company sales originated outside of the US.

“If we look at the last 10 years, the divergence between the corporate profits of S&P 500 companies and domestic GDP growth is astonishing,” said GC Mays, an Independent / boutique research firm analyst in his Seeking Alpha blog. “Between the first Quarter of 2001 and 2006, a simple correlation showed that corporate profits explained 98.4 percent of domestic GDP growth. However, the most recent five years beginning with the first quarter of 2006 the correlation between corporate profits and domestic GDP growth breaks down as corporate profits only explain 10.1 percent of domestic GDP growth.”


Graph:  The Mays Report

Why is it necessary to increase jobs when we now know we can have economic growth without job growth? Well, beside the obvious voter anger if politicos don’t take the lead in creating more jobs, it means taking away the demand that can grow the domestic economy. Corporate profits have risen to the highest level as a percentage of Gross Domestic Product since the Great Depression—14 percent—but much of the profit comes from overseas’ sales of U.S. companies, as we said.


And that doesn’t augur well either for decreasing the record income inequality for most wage earners or growing domestic jobs. Since World War II the unemployment rate has twice reached 10 percent—during the 1981-82 and just ended 2007-09 recession. But because of the housing and financial crashes that accompanied the Great Recession—or Small Depression, as Krugman has christened it—consumers are not spending and employers not hiring domestically as they have in past recoveries.

That means corporate profits are no longer dependent on domestic demand, so are not going to help reduce the various deficits—both household and governmental—without explicit policies to create more domestic jobs. It’s a straightforward equation. Decreasing domestic unemployment means decreasing domestic deficits, and growing household incomes means growing domestic businesses. But since corporations are no longer dependent on growing domestic jobs to sell their products, what policies will? Director Lagarde says it best:

“First—the nexus of fiscal (budget) consolidation and growth. At first blush, these challenges seem contradictory. But they are actually mutually reinforcing. Credible decisions on future consolidation—involving both revenue and expenditure—create space for policies that support growth and jobs today. At the same time, growth is necessary for fiscal credibility—after all, who will believe that commitments to cut spending can survive a lengthy stagnation with prolonged high unemployment and social dissatisfaction?”

We can hope that Labor Day will be a cause for celebration; an international coming together of Big Business and dueling politicians on the need for concrete job creation policies. Make no mistake that as the public becomes better informed on the causes of the current employment malaise, they will seek out leaders who can implement the reforms necessary to correct the imbalance between growing corporate profits and declining payrolls.

“In sum,” concludes Lagarde, “risks to the global economy are rising, but there remains a path to recovery. The policy options are narrower than before but there is a way through. There are lingering uncertainties, but resolute action will help to dispel doubts.”

Harlan Green © 2011