Take a deep breath. The industrialized world of the west—very much including the United States—seems to be in one of those horror movies where the monster thought to be slain morphs into something even more scary. The International Monetary Fund phrase for this scenario, in its new report, is that "the global economy is in a dangerous new phase," stark language for a financial institution. The fear is that the double-dip or worse may be upon us.
The most extensive and dramatic fiscal and monetary stimulus policies in U.S. history have failed to trigger a recovery dynamic where growth can be sustained without reliance on government steroids. To put it in context, the United States is a 235-year-old country, yet over 40 percent of the entire national debt has been accumulated by this administration in slightly less than three years, and 60 percent of the total money supply has been created in a similar period. It could be argued we would have been even worse off if we had done nothing. But the hard fact is that money has not bought us an improving economy or restored confidence in consumers or the business community.
The Obama administration, along with many forecasters, had predicted a V-shaped recovery and expansion based on the historical experience of the 1970s and 1980s, when sharp recessions were followed by equally sharp rebounds, reflected in growth rates of 6 or 7 percent. Not this time. The $4 trillion of fiscal and monetary stimulus has produced less than $1 trillion in growth or about 25 cents for every dollar invested. GDP growth is running at about 1.8 percent this year. Two thirds comes from the growth in business inventories rather than final sales to consumers, which translates into an annual rate of 0.6 percent and a quarterly increase of 0.15 percent.
Meanwhile, real per capita income remains below its 2006 level. The Wall Street Journal reports that the income of a typical American family, adjusted for inflation, is 7.1 percent below its 1999 peak and that the earnings of the typical full-time working male are lower than in 1978. Real wage-based incomes are on the decline. Given the combination of a shorter work week, unemployment, and consumer prices, the year-over-year pace since June is at a 4.8 percent annualized decline. Little surprise that adjusting for inflation, retail sales last month also contracted at nearly a 5 percent annual pace while the proportion of Americans living in poverty has soared to 15.1 percent.
This is a modern-day depression. It is not the 1930s because, as economist David Rosenberg of Gluskin Sheff points out, "The soup lines have been replaced with unemployment payment checks. Over 10 million such checks are being sent out now for up to 99 weeks."
Businesses are focusing on enhancing productivity rather than expanding employment. There has been no net increase in full-time employment since the Obama presidency began. These days, hiring is concentrated on temporary and part-time workers. In the last five months alone, we have lost just shy of a million full-time employment jobs. As a result, forecasters are racing to reduce their projections of U.S. growth, reflecting disappointing data across the board on spending, employment, and confidence.
The business community has grown increasingly pessimistic. According to the most recent Duke University/CFO Magazine Global Business Outlook Survey, 65 percent of U.S. executives are gloomy. Only 12 percent are more optimistic. "In the past six months, one third of U.S. companies say they have delayed or cancelled previous plans for capital spending," notes the survey. It did not help that the U.S. government lost credibility by risking a precise prediction (best left to fortune tellers). It asserted that its well-intentioned recovery programs would bring the jobless rate down to around 7 percent and that the multiplier effect from government investment would bring much higher levels of growth.
This was the beginning of a yawning credibility gap between the Obama administration and business. It has been aggravated by the administration's tendency to lay blame on the so-called fat cats of the business and financial communities and to pillory the president's favorite villains: "millionaires and billionaires," by his definition any family or business with an income of more than $250,000 gross. The resort to divisive populism is exactly the wrong approach. It seeds the suspicion that the administration is more interested in campaigning than in rallying the national will. It undermines the confidence that business needs if it is to invest in the face of a costly new generation of regulations, healthcare costs, and an increased bureaucracy.
The chief economist of the National Federation of Independent Business recently wrote that business owners do not trust existing or proposed economic policies. They sense that the administration does not understand how perceived hostility saps the "animal spirits" required for taking risks on expansions and start-ups. It further fails to understand the needs and aspirations of small businesses, the creators of two thirds of the new jobs in the growing economy.
Unemployment is reason of itself for depression. It is true the president has "pivoted" belatedly to job creation, but more and more people are out of full-time work. Typically in the third year of a post-recession recovery something like 170,000 jobs are added every month. Our score is zero. The real unemployment rate is reflected more in the U-6 analysis of the rate, now at 16.1 percent, a number which makes more sense than the U-3 number. That number, considered the official unemployment rate, measures only people who applied for a job in the last four weeks; U-6 includes all those who have applied for a job within the last six months and those who are involuntary part-time workers. U-6 is more relevant, given that the mean period of unemployment is roughly 40 weeks. Add to that the lower labor participation rate—caused by people who have given up looking for a job—and the 16.1 percent grows to 19 percent or some 25 million people. And six million of the unemployed have been out of work for more than six months. Such long unemployment spells can lower lifetime earnings and increase the risk of structural unemployment or employment at lower lifetime pay because skills developed on the previous job are lost. Those who lose stable jobs often suffer a 20 percent earnings loss for 15 years or more. As Barron's Alan Abelson wrote recently, "If things keep going this way, come the first Monday of September next year, we'll be commemorating Layoff Day instead of Labor Day."
Consumers are clearly not going to generate sales growth if we take measure of consumer confidence from the Conference Board. Their confidence level conventionally comes in at 102 during periods of prosperity, and at 73 during recessions. Now it has plunged to 56. The University of Michigan consumer confidence numbers also have fallen to levels that are 20 percent or more below the previously low levels of earlier recessions. These numbers match the drop in confidence seen after the Iran hostage crisis, Iraq's invasion of Kuwait, and the collapse of Lehman Brothers.
No wonder that in the 14 quarters since the beginning of 2008, inflation-adjusted growth in consumption averaged just 0.5 percent, the longest period that consumption has been this weak since the end of World War II. Discretionary spending indeed may be altered for years or at least until the scars from the traumatic experience of unemployment and defaults fade away.
When governments are shown to be powerless or incompetent, ordinary people suddenly realize that their elected officials have neither the understanding, the political power, and sometimes not even the will to do what is necessary. In part this is because they are scared of voter backlash in their constituencies. At that point, despair and alienation takes control of public opinion, and people concentrate on preserving what little of their long-term prospects and savings they can.
This is the dismal point we have reached today. Confidence in our government has fallen so far that a recent Gallup poll finds only 26 percent of Americans approve of the president's handling of the economy.
There is a sense that there are not too many effective tools left in the government toolbox. The era of frugality is back. Today it is not a stock market or residential real estate crash but a crash in confidence that will constrain the effectiveness of public policy and have long-lasting impacts on the consumer and, thus, on the economy. The historic American optimism has dramatically eroded. The Great American Dream is no longer a house in the suburbs. It is now a secure job, but almost any job will do.
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