Way to Go Boys and Girls: Countdown to RecessionPosted: August 2, 2011 Filed under: Domestic Policy, Economy, Federal Budget and Budget deficit, U.S. Economy, We are so F'd | Tags: economy killing debt deal, low growth, recession 6 Comments
So, I’m watching the US stock market plummet and laughing to myself in a most unhealthy way. NOW, they’re worried about no growth and jobs. What a buncha marroons! But hey, we maintained that AAA rating so the flight to safety has begun. Gold any one?
“We have a stubbornly slow economy,” Hank Smith, chief investment officer at Haverford Trust Co. in Radnor, Pennsylvania, said in a telephone interview. His firm manages about $6.5 billion. “The economy is stuck in a very slow growth mode, which means that it’s more susceptible to any external shocks.”
Harvard University economics professor Martin Feldstein said he sees a 50 percent chance that the U.S. will relapse into another recession.
“Nothing has given us much growth,” Feldstein said today in a Bloomberg Television interview on “Surveillance Midday” with Tom Keene. Feldstein is a member of the committee that dates recessions for the National Bureau of Economic Research.
Today’s retreat brought the S&P 500 to within 1 percentage point of its low for the year on March 16 and trimmed its year- to-date gain to about 0.5 percent. All 10 industry groups fell, led by a 2.4 percent slump in industrial companies. General Electric Co. lost 3.7 percent to lead declines in 29 of 30 stocks in the Dow Jones Industrial Average.
Archer Daniels Midland Co., the world’s largest grain processor, tumbled 2.4 percent as earnings trailed projections after corn and tax expenses rose. MetroPCS Communications Inc., the pay-as-you-go mobile-phone carrier, lost 35 percent for the biggest decline in the S&P 500 as sales fell short of analysts’ forecasts.
What if they gave a recovery and nobody came? So, What’s missing from the debt ceiling debate? Jobs. In an aggregate demand led recession, what gives us growth is healthy government spending, not tax cuts, and certainly not austerity. Welcome to the new anti-growth fiscal policy.
The unemployment rate, currently above 9 percent, is projected to remain high for a long time. For example, the current Blue Chip Economic Indicators consensus forecast puts the average unemployment rate for 2012 at 8.3 percent. The agreement to raise the debt ceiling just announced by policymakers in Washington not only erodes funding for public investments and safety-net spending, but also misses an important opportunity to address the lack of jobs. The spending cuts in 2012 and the failure to continue two key supports to the economy (the payroll tax holiday and emergency unemployment benefits for the long term unemployed) could lead to roughly 1.8 million fewer jobs in 2012, relative to current budget policy.
The agreement would reduce spending by at least $1 trillion over 10 years through budget caps on non-mandatory programs, with additional reductions under discussion in a second phase. While the bulk of the cuts are back-loaded – coming more in the future – the near-term cuts would still have an immediate impact. Applying conventional multipliers, the reduction of $30.5 billion in calendar year 2012 would reduce GDP by 0.3%, and result in roughly 323,000 fewer jobs (as depicted in the table below).
In addition to the immediate cuts to spending, the debt ceiling agreement fails to continue two major policies which had been part of broad agreements in the past. The payroll tax holiday and extended unemployment insurance were passed last December along with the two-year extension of the Bush-era tax cuts; but are set to expire at the end of 2011. While Congress could still extend these policies between now and the end of the year, that scenario is looking much less likely today. (Any economic support subsequent to this deal would have to be offset by other tax increases or spending cuts in 2012 or a further increase in the debt ceiling, neither of which seems politically viable.)
But wait, didn’t the know-it-all in chief just say jobs were priority one now? Well, let me just laugh. Even Andrea Mitchell knew enough to ask the dmbest person in nearly every room–Valerie Jarrett–with what money are you going to be doing that?
“As we go through the package, and members are beginning to learn what’s in the package, they’re seeing,” the reaction is “better and better,” White House senior adviser Valerie Jarrett said on MSNBC’s “Andrea Mitchell Reports.”
“I’ve been on many of these calls since last evening with a wide variety of people who were initially skeptical,” she said. “But when they see the details of the package, they’re becoming increasingly comfortable.”
The deal reached by the president and congressional leaders is “not perfect,” Jarrett said, and is “not the package that the president would have wanted.”
Even so, she said, “it is a package that stays true to his values and his goals, No. 1, long-term certainty, and No. 2, making sure that the people who can least afford to suffer are protected.”
The Economic Policy Institute, a top nonpartisan think tank, estimates that the deal struck this weekend to raise the nation’s debt limit will end up costing the economy 1.8 million jobs by 2012. Today the Senate is expected to approvethe package passed yesterday by the House and send it to President Obama. But while the unemployment rate remains above 9 percent, the deal does nothing to address chronic joblessness.
The agreement would reduce spending by at least $1 trillion over 10 years, but even the near-term cuts could shrink already sluggish GDP growth by 0.3% in 2012. According to EPI, the plan “not only erodes funding for public investments and safety-net spending, but also misses an important opportunity to address the lack of jobs.” In particular, the immediate spending cuts and the “failure to continue two key supports to the economy (the payroll tax holiday and emergency unemployment benefits for the long term unemployed) could lead to roughly 1.8 million fewer jobs in 2012.”
What we should be worrying about is all the news that Washington has ignored while it was doing the debt ceiling shuffle. Most importantly, the economy has almost stopped growing and unemployment is again on the rise.
On Friday, the commerce department released data showing the economy grew just 1.3% in the second quarter. Even worse, it revised down the first quarter growth number from 1.9% to just 0.3%. This means that the economy was growing at just a 0.8% annual rate over the first half of 2011. This is well below the 2.5% pace that is necessary just to keep unemployment from rising.
Of course, unemployment has been rising, with the June figure hitting 9.2%. That is up from a post-recession low of 8.8% in March. The unemployment rate does not give the whole story, since many of people have lost hope of finding a job and given up looking for work altogether. The employment to population ratio (EPOP) – the percentage of the population with jobs – has fallen back almost to its low point for the downturn. The EPOP for African Americans has hit new lows in each of the last three months.
The revisions also provided other interesting pieces of information. For example, corporate profits were revised sharply higher for both 2009 and 2010. The share of profits in corporate sector output hit a new record high, more than a full percentage point above its previous peak. Finance was the biggest winner within the corporate sector, accounting for 31.7% of corporate profits, also a record high.
In short, we now have an economy that is stuck in the doldrums. It is operating well below its potential level of output. Furthermore, instead of catching up, it appears to be falling further behind. We are seeing a growth rate far below the economy’s potential, when we should be seeing growth that is far above potential. And the Wall Street guys are fat and happy.
Believe me, an economy “stuck in the doldrums” will look good this time next year. If Mitch McConnell wanted to over throw or throw over the country, he sure succeeded. Some one needs to whip his sorry ass.