Last Friday, May 4, the U.S. labor department released its jobs numbers for April, confirming a prediction made by this writer this past winter that employment creation would once again slow this spring - for the third time in as many years. Jobs created in April declined to only 120,000, less than half the average monthly gains this past winter. Only days before the release of the April jobs numbers, GDP growth for the US economy as a whole were also released. The fourth quarter GDP growth rate of 3% declined to 2.2% in the first quarter, January-March 2012. The slowing of the US economy now underway is evident not only from the GDP and jobs data, but from a host of other indicators reported in recent weeks: business spending, durable goods orders, construction activity, services spending, slowing wage growth, to name but the most obvious.
The jobs numbers for April and other economic data thus suggest a continuing slowdown of the US economy has begun in the current second quarter of 2012. That decline will likely continue further in the months immediately ahead, to possibly as low as 1.5% the second quarter, April-June 2012.
The hot air trial balloon floated by the press and pundits this past winter - that the US economy was finally, after a third try in as many years, about to take off on a sustained growth path in 2012 - is thus once again about to deflate. The US economy remains mired in the stop-go trajectory that has characterized it since early 2009: short shallow rebounds punctuated by brief relapses and slowdowns - a condition and prediction this writer raised nearly three years ago with the publication of the work, Epic Recession, and reiterated last November with a latest work, Obama’s Economy: Recovery for the Few’, just published this April.
Obama’s Fundamental Strategic Error
The partial, stop-go recovery in the US, which has benefited stocks, bonds, corporate profits, CEO pay, and bankers’ bonuses, but virtually nothing else is the direct consequence of failure of fiscal-monetary policies of the Obama administration. Republican policies, from Reagan to Clinton to GW Bush, caused the economic crash of 2007-09. But Obama policies - policies that favored the banks and corporate America the first two years and then tail-ended teaparty radicals in Congress since 2010 - are clearly responsible for the failure to generate a sustained recovery ‘for all but the few’. Republicans and corporate America clearly created the mess; but Obama and corporate America have clearly failed to clean it up.
Obama policies since 2009 amounted to more than $1.5 trillion in tax cuts that mostly benefited business and investors plus another $1.5 trillion in spending that has been largely subsidies to states. Less than $100 billion was allocated for long term infrastructure spending, of which only $64 billion has been spent to date. Less than $50 billion was directed to rescuing homeowners and resurrecting the housing sector. Meanwhile, more than $9 trillion was provided in bank bailouts by the US Federal Reserve central bank.
The fundamental strategic error of the three Obama recovery programs since 2009 was to bailout the banks without ensuring that bailout directly result in lending to small and medium businesses; to provide massive tax cuts, mostly for businesses, without any guarantee it would result in immediate business investment and US jobs creation; and to provide subsidies to the states without proof and assurance of job creation.
The Obama strategy was to put a floor under the collapse of consumption for one year, to buy time for the tax cuts and bank lending to get going. After a year, the more than $400 billion in 2009 subsidies spending would be used up, and business (‘the market’) was supposed to take up the slack, to lend, to invest, and to create private sector jobs. The job creation would then reduce the rising foreclosures, restart the housing sector, raise local government tax revenues, and reduce the federal government’s deficit - the major cause of which has been the lack of recovery and tax revenue restoration. It all depended on corporations and banks taking the lead in recovery after a year.
But it didn’t happen that way. Although Obama provided the massive subsidy stimulus for a year, Big Corporations took the tax cuts and sat on them, accumulating a cash hoard of more than $2.5 trillion. Banks in turn took the $9 trillion in zero interest loans from the Federal Reserve, recovered profits, paid themselves bonuses, and either hoarded the remaining more than $1 trillion excess reserves, or lent it to speculators, and loaned it to emerging markets abroad - none of which did anything for small-medium business investing and recovery in 2010 and beyond. In short, Obama’s ‘market’ strategy broke down as banks and big businesses hoarded the bailout.
Obama compounded the problem in a second recovery program in late 2010 that provided another $802 billion in tax cuts only and a mere additional $55 billion more in subsidies. That didn’t work either. In mid 2010, he turned over his jobs creation program to big multinational corporations. That resulted in more corporate tax cuts, new free trade agreements, and more business deregulation that created a dribble of jobs. He then scuttled the States’ efforts to stop the 12 million and still growing foreclosures problem and guaranteed banks’ limited liability for the robo-signing foreclosure scandal. Meanwhile, local governments’ finances continued to deteriorate, as they laid off hundreds of thousands more workers, slashed benefits, cut services, and raised fees.
Instead of taking the ‘bailout to Main St.’ in mid-2010, before the midterm elections, he deferred to his new corporate advisers taken into the White House that summer. The result was a loss of Democrats’ control of Congress in the midterm elections, and a shift in policy in Washington from recovery to deficit cutting. Obama conveniently let the Teapublicans take control of the policy agenda thereafter in 2011, and attempted to compete with them as a still bigger deficit cutter than they by offering to cut social security, Medicare and Medicaid by more than $700 billion.
All past recoveries from recessions in the US were characterized by job creation of 300-400,000 a month for at least six consecutive months; by a robust recovery of the housing sector leading the way; and by local government hiring to offset private sector job loss during the downturns. None of this has happened since 2009. To the contrary, government has taken the lead in job destruction, laying off nearly half a million people; housing has lingered in depression conditions and local governments across the economy continue to layoff, cut services, and raise taxes.
It is not surprising, therefore, that US recovery has been an anemic ‘stop-go’ affair. Late in 2011 a still third feeble ‘rebound’ began to occur, as evidenced in GDP statistics for that quarter. But what lay behind those fourth quarter stats? What followed in the first quarter 2012? And what may we look forward to, especially after the November elections?
The Over-Estimated Fourth Quarter 2011 Data
The fourth quarter 2012 GDP number of 3.0% was hyped at the time as a predictor of future accelerating recovery, but a closer inspection of the 3% clearly showed it was built upon temporary factors that could not be sustained - as this writer pointed out in a previous article:
Briefly revisiting those factors showed the following limitation of that 3%. First, a full two thirds of the 3%, or 1.8% of it, was due to business inventory building. This inventory investment was a recouping of third quarter 2011 collapse in inventories. So two thirds of the activity represented delayed prior quarter growth. Second, non-inventory business spending growth in the fourth quarter was 5.2%, but it reflected end of year investment claims of tax cuts that were going to end. Consumption spending was also up. But it was driven by auto sales made possible by auto companies’ year-end deep discounting and nearly free credit to borrowers. In other words, by debt. Credit card debt spending also rose significantly, as banks began throwing cards at customers in a way reminiscent of pre-2007 practices. Not least, non-credit based consumer spending was driven by spending fueled by household dissavings.
A more fundamental, healthy consumer spending trend required real income gains for the bottom 80% households. But that was conspicuously missing. Throughout 2011, wages, the most critical source of household income for the bottom 80%, rose only 1.8% while prices rose 3.5% - continuing the trend of a 10% decline in household income over the decade.
Also on the negative side, government spending at all levels continued to decline in the fourth quarter: Federal spending fell by –6.9% and state and local government by –2.2%, serving as major drags on the economy in the quarter as they had all year long. It is not surprising that these factors - temporary in character - did not continue into the first quarter of 2012 at the same level.
1st Quarter GDP Data: Further Slowing To Continue
So how did each of these above elements behind the preceding quarter’s 3% growth perform, thus resulting in the decline to 2.2% for January-March 2012?
As predicted, inventories slowed significantly: from contributing two-thirds of the prior quarter’s growth to only 0.59% of the 2.2%, or about a fourth of the latest quarter’s growth. And that contribution will continue to decline in future quarters.
Business spending fell by –2.1% after the prior quarter’s rise of 5.2%. Commercial building plummeted by –12% and the important equipment and software segment fell to only 1.7%. The only improvement was residential housing. But that was mostly apartment building and driven by highly untypical warm weather conditions. As far as consumer spending was concerned, the conditions worsened as well. Nearly 50% of all consumer spending was paid for out of dissaving, as the savings rate fell from 4.5% to 3.9% in just one quarter. That kind of spending was, and remains, unsustainable. Auto sales, a major support of spending in the fourth quarter, began to fade by April 2012 as well. Meanwhile, both federal and state-local government continued their downward trajectory in the first quarter 2012, declining by another –5.6% and –1.2% respectively. Finally, a new negative element began to appear: manufacturing exports grew more slowly than imports, resulting in an additional decline in GDP that will likely continue into the second quarter as well.
What this overall six month scenario shows is that the US economy is not only NOT on an ascending growth path and recovery in the current election year, but is rather clearly on a descent in terms of economic growth. The factors that produced a very modest fourth quarter 3% GDP growth clearly weakened across the board in the first quarter 2012. They will mostly continue to weaken into the second.
Meanwhile, the Obama administration’s primary reliance on Manufacturing and exports to drive the US economy toward recovery are beginning to weaken. With the slowing global economy in Europe and even China and elsewhere, exports will not drive manufacturing any more than manufacturing is capable of driving the US economy. Manufacturing represents barely more than a tenth of the US economy and accounts for only 11.8 million out of 154 million jobs. Manufacturing jobs and manufacturing share of the economy, moreover, has not grown at all for the past decade. Since putting General Electric Corp’s CEO, Jeff Immelt, in charge of his manufacturing and jobs recovery programs two years ago, Obama has given Immelt and friends everything they’ve asked for: new free trade agreements, new tax cuts, backing off of foreign profits tax reform, patent protections, business deregulation, etc.. In return, manufacturing has added less than 15,000 jobs a month on average since mid-2010 and many of those jobs at half pay and no benefits.
During this past winter, press and pundits were not only arguing the US economy was on a sustained growth path, but that the US was about to lead the global economy to sustained recovery as well. Forget the obvious facts at the time of an emerging recession in Europe or a slowing of the Chinese, Brazilian and Indian economies. Europe, they predicted, would experience a historically mild downturn. And the Chinese, Brazilian and Indian economies would experience a ‘soft landing’. In recent weeks, however, it appears the Eurozone is headed from a deeper, more serious recession and the Chinese and other BRICS economies are headed for a ‘hard landing’ rather than soft.
Events and conditions unfolding the last nine months are showing China and the BRICS economies have proven unable to ‘decouple’ from the continuing global economic crisis that is still far from over. So too will the US economy prove unable to grow - i.e. ‘decouple’ - while the Eurozone descends into a serious contraction and the BRICS slow faster than anticipated. ‘Decoupling’ of any economy from the global, dominant trends is ultimately impossible. GDP stats in the US may go up and down for the remainder of the year over the short term, but the long term trend is toward a further ‘stop-go’ trajectory and a continued ‘bouncing along the bottom’ in terms of economic recovery.
As a consequence, Obama may be headed toward a repeat of the ‘Jimmy Carter Effect’. Carter failed to resolve another major economic crisis in the 1970s. He too turned toward corporate support and policies after 1978. Corporate America took his handouts, turned on him, and dumped him in 1980. Reagan did not ‘win’ the election; Carter lost it. Should GDP and economic recovery continue to falter in 2012, Obama may well end up repeating history. If so, however, he will have lost not in 2012, but in policies introduced (and not introduced) in 2010 - when he made a deeper turn toward corporate influence instead of turning to extend the bailout and recovery to Main St.