While President Obama is out on the campaign trail talking about how bad things were four years ago, and how we have to go “forward” to his second term to see just how great things are going to be in the next four years, the biggest problem he’s got is the here and now.
Real GDP in the second quarter stalled at 2.2 percent. There were a paltry 115,000 new jobs in April. The labor force shrank by 342,000 for the month, and the 63.6 percent labor-force participation rate is now the lowest since 1981. There are roughly 23 million people classified as either unemployed, underemployed, or no-longer-looking. And median household income has dropped by $4,300 during Obama’s time in office. This all adds up to a tough indictment of the administration’s economic policies.
After declaring that the world is in a state of “late Great Depression” on Tuesday, renowned Yale economist Robert Shiller hedged his words on that evening’s Kudlow Report. “Did I say that?” he remarked. “Well, I think there are a lot of analogies to what we’ve been going through to that of the Great Depression, but I don’t really think we’re in a depression, so I might have said it slightly wrong.”
Shiller, co-developer of the Case-Shiller index on housing trends and author of Finance and the Great Society, told me that while the U.S. is not in recession, certain elements of the economy resemble one. “The persistence of high unemployment is a problem,” he said, along with interest rates at “depression levels.”
On Monday, in an interview with Squawk Box Europe, Shiller said the world is in a “new age of austerity.” He said, “Our whole economy has been affected by variations in confidence. Central banks are sort of trusted, but the actions they have often affect people’s confidence by appearance rather than substance. We’re not in the most trusting mood now.”
And when I asked him on Tuesday whether the economy is in a recovery, Shiller said “not quite.”
“Depends on how you define these things. In some ways, we are not in a recovery. Look at the employment-population ratio. It’s stuck at 58.5 percent. That’s kind of close to the lowest it’s been in this whole debacle,” he said. “We haven’t recovered jobs. Unemployment rate is down, but that is because people have left the labor force.”
Shiller also reiterated his support for Keynesian stimulus. “I’ve been advocating raising taxes and expenditures as a temporary measure to get us out of the weak economy,” he said. “That’s the balanced-budget multiplier first proposed by William Salant and Paul Samuelson in the 1940s. Now’s the time to use it.”
And when I challenged him on the idea that President Obama’s stimulus hasn’t worked, Shiller defended it. “We’ve had a worse recession than anybody expected,” he said. “I don’t think it proves that the principle is wrong. I think we need to do that. We can’t give up on the economy.” Shiller claimed that the Obama stimulus has had “no impact on the natural debt.”
He did, however, say that he still believes in market forces. “I would like to see financial markets expanded,” he said, adding that he had faith that the stock market was still a good bet.
Asked to weigh in on Jeremy Siegel’s prediction that the Dow would hit 17,000 by the end of 2013, Shiller took a more modest outlook. “I agree with [Siegel] that stocks are a good investment,” he said. “I’m just not as high and gung-ho as Jeremy is.”
Businesses aren’t investing in the U.S. because of a lack of consumer demand, International Paper CEO John Faraci told me on Friday’s Kudlow Report. “I think this was all about consumer spending and demand,” he said. “You know, the problem we have is there’s inadequate demand to create jobs. We know how to respond when there is demand.”
The U.S. Commerce Department estimated that gross domestic product expanded at a 2.2 percent annual rate in the first quarter, falling short of analyst expectations for 2.5 percent growth and coming in well below the fourth quarter’s 3 percent rate.
Faraci said consumer spending has been dampened partly because the nationwide housing market has yet to recover. “Until it does,” he said, “we’re not going to see the kind of consumer spending you would expect coming out of a recovery.”
When I asked Faraci why companies are not investing, he once more pointed to demand that has not materialized. “Productivity has obviously been very good, so we’re creating more capacity with less resources,” he said. “But at the end of the day, this is really about responding to demand, whether its automobiles or packaging products we make for a whole variety of industries and end users.”
“We’re investing in India. We’re investing in Russia. We’re investing in Brazil,” Faraci added. “Not to ship products back here, but because demand exists in those markets. At the end of the day, this is really about responding to demand. We’re not going to go out and invest unless there’s demand.”
Don Peebles, CEO of Peebles Corp., a real-estate developer, agreed with Faraci that housing remains a drag on the economy. Where a strong market, cheap money, and high leverage fueled growth before the financial crisis, Peebles said “the housing market is not [now] able to carry the economy.” According to Peebles, “Americans’ wealth has been decimated as a result of the lost value in their homes.”
Peebles also acknowledged that rising health-care costs and uncertainty over taxes are a challenge. But he added that the number-one issue is access to capital.
Rounding out Friday’s business panel was Mort Zuckerman, founder of real-estate investment trust Boston Properties and publisher of the New York Daily News and U.S. News & World Report. Zuckerman blamed the housing-market collapse, as well as health-care costs and an “inadequate, badly structured stimulus program,” for today’s lackluster growth picture.
“Clearly,” Zuckerman said, “you should’ve had a GDP growth now of somewhere between 6 and 8 percent, with the degree of monetary and fiscal stimulus.”
Is Tim Geithner the most politically partisan treasury secretary in history? Certainly sounds like it these days. As the government’s chief financial officer, he’s spending a lot of time firing campaign barbs at various Republicans and their policies.
Geithner has blasted Mitt Romney by name on several occasions. He frequently attacks Representative Paul Ryan and the GOP budget. And he recently fired a broadside at top-Romney economist Glenn Hubbard, who is presently dean of the Colombia Business School.
Responding to a Hubbard op-ed in the Wall Street Journal — which calculated that the president’s spending plans would require an 11 percent tax increase on people earning less than $200,000 a year — Geithner said, “That’s a completely made-up, remarkably hackish observation for an economist.”
Wall Street headlines are full of fears of a springtime stall for the already subpar economic recovery. And if that weren’t bad enough for Obama’s reelection chances, a spate of new polls show Mitt Romney’s economic-approval ratings are far outdistancing the president’s.
Even while the headline surveys basically show an Obama-Romney tossup, it will be very difficult for Obama to pull out a victory this fall. Traditionally, incumbents who poll below 50 percent are in trouble. And with Obama consistently in the mid-40s, he has a tough uphill climb ahead.
In my latest interview with Mitt Romney, the former Massachusetts governor emphatically defends his own business success against Obama’s class-warfare/Buffett Rule/Romney Rule attacks. Don’t look for Mitt to back off from his free-enterprise vision.
He also told me hewill go after HUD and DOE for budget cuts and consolidation, along with a slew of other agency cuts. He also will roll back tax deductions for upper-earners while he lowers marginal rates by 20 percent across-the-board. He does not want more stimulus from the Fed. And he thinks blaming speculators for high energy prices is completely wrong.
He would roll up his sleeves to deal with taxmageddon immediately during his transition if elected. And wants his veep to be able to lead the country as president if that were necessary. He believes women can meet that requirement, as well as men.
In President Obama’s latest class-war, tax-the-rich gambit, he has stooped to a new low with misleading and out-of-context quotes from Ronald Reagan. Apparently, the president is now trying to use the Gipper for cover while he attacks Mitt Romney with the so-called Buffett Rule.
In an address this past week, Obama cited a couple of Reagan speeches from June 1985, in which the former president quoted a letter from a wealthy executive who grumbled that he paid less in taxes than secretaries or bus drivers. Obviously, Obama was trying to draw a parallel with Warren Buffett’s complaint that his tax rate is lower than his secretary’s, and to the resulting Buffett Rule, a proposed 30 percent minimum tax on millionaires. With a tongue-in-cheek flourish, Obama referred to Reagan as “that wild-eyed, socialist, tax-hiking class warrior.”
Despite the disappointing jobs report for March, it’s very difficult to make a realistic case that the economy is falling off a cliff, or that some kind of double-dip recession is on the way. Or that a Ben Bernanke QE3 is likely.
Sure, the 120,000 gain in nonfarm payrolls — roughly half of expectations — is causing a downgrade in growth psychology. Ditto for the 31,000 drop in household employment. But if you smooth out these numbers over three months, payrolls have averaged a 212,000 increase, while small-business household jobs are still up a big 415,000.
But let’s not forget other data points: ISM indexes in the mid-50s are still reasonably strong. Consumer confidence has been rising. Jobless claims have been falling. Car sales are solid. And chain-store sales are beating expectations. It still looks like a 2.5 to 3 percent economy.
You wouldn’t know it from falling stocks, but the Fed’s apparent decision to hold off on future bond buying, or QE3, in response to an improving economy may turn out to be a very bullish omen for the equity market and the economy.
In fact, less stimulus from the central bank sets up a potential tax-cut effect. Here’s why: Limits to the Fed’s $3 trillion balance sheet will bolster the value of the dollar.
The beleaguered greenback has fallen roughly 40 percent over the past ten years as a result of the Fed’s interventionist go-stop-go policies. Since the banking crisis of 2008, the dollar has dropped 8 percent.
But as the Fed ended QE2 last year, and as its bond-buying “operation twist” comes to an end in June, the dollar has started rising. In response, gold prices have been falling significantly. Slower money creation will do that.
And along with gold, oil prices are now slipping lower, with West Texas crude approaching $101. Still too high, but much less scary. Wholesale unleaded gas prices also could fall in response to the drop in crude, which might take the pressure off retail gas at the pump. If that’s the case, and the King Dollar scenario plays out, the recent energy-price shock could reverse, imparting a mild tax-cut effect on consumers and businesses.
Although Bernanke & Co. do not target the dollar, a stronger greenback is the surest way to bring down energy and food prices, which all too often have plagued households and the economy.
The Joint Economic Committee has estimated that the cheap dollar has contributed about 45 cents to the rising gas price. Lately, with the drop in crude oil, nationwide gas prices could be starting to level off at just over $3.90 — even though refiner closings and bottlenecks in some parts of the country have pushed that price much higher.
No, a stronger dollar won’t offset the failure to implement the Keystone Pipeline. But it could provide some motorist relief at the pump.
The point is, if the Fed quits printing new money, the value of dollar money will go up. And the inflation tax will go down. Despite Ben Bernanke’s economic worries, the Fed is beginning to see that the economy is at least growing by roughly 3 percent. That’s not fabulous, but it’s not bad either.
The latest ISM surveys for manufacturing and services, the decent 209,000 ADP employment report for March, and pretty good car sales all suggest that the first-quarter economy was just as good as the fourth-quarter economy. And these economic stats are moving the Fed away from more easing moves. Hence, King Dollar is recovering at least a bit.
The dollar view on the economy and stocks is a minority case, but a very important one that should not be overlooked. During prior stock market booms, particularly in Reagan’s first term and Clinton’s second term, King Dollar rose and gold fell, oil prices came down, and foreign capital sought out dollar investments in the U.S. because of the reliability of the currency.
As Ronald Reagan famously said, “There you go again.”
Of course, Reagan was blaming Jimmy Carter for launching false attacks during a debate. And that line was so effective, it not only helped Reagan win the debate, but a presidential election that would change American history.
But “there you go again” can apply equally to President Obama. Once again this week, the president was out on the campaign trail bashing and oil and gas companies. And he continued to spread major falsehoods about this industry, which I guess is the polite way to put it.
