Tuesday, June 08, 2010

Economy slumping because of government efforts to turn it around

Commentary by James H. Shott

Try as he might, President Barack Obama just can’t put a pretty face on the latest economic figures.

Prior to the release of the May job numbers, economists surveyed by MarketWatch expected an increase of 540,000 nonfarm jobs, but when the jobs report came out, it showed only 431,000 jobs had been created.

Even so, Mr. Obama told us that the May job report is evidence that the U.S. economy is "getting stronger by the day," and then admitted that 411,000 of those were temporary government Census workers, which means, of course, that only 20,000 real jobs were created.

But even the new Census hiring is suspect. A number of Census workers have come forward saying that they were hired, trained, worked a day or two, were laid off, then rehired for a repeat of the cycle as many as three times. Each re-hire was counted as a new job, raising the new jobs total. But that doesn’t sound very much like a real job, does it? Not even a real “temporary” job.

This disappointing private payroll number was a much weaker result than many economists had expected, and that sentiment was shared by investors, who drove the Dow Industrials to a 323-point slide on Friday, the second time in two weeks the DJIA has closed below 10,000.

The small jobs increase was accompanied by a decrease in unemployment, which fell further than economists expected, dropping to 9.7 percent in May from 9.9 percent in April. But even that news has an asterisk beside it, since much of the decline came from 322,000 unemployed people who dropped out of the labor force and are no longer counted among the unemployed.

Looking deeper into the unemployment data, many analysts regard the number that includes discouraged workers – like those 322,000 who dropped out of the workforce, and those forced to work part-time because of the weak economy –as a more relevant measure of unemployment. That number is 16.6 percent.

Thirty months into the recession, unemployment continues at high levels. The low point in October of 2006, when the rate was 4.4 percent (five percent is considered full employment), is a distant memory, and the rate hovered just above that level until May of 2007, at which point it started to creep up, hitting 7.4 percent in December of 2008. Since then, there has been no good news on employment, and some economists predict the rate will bump up against 10 percent through the summer.

Employment is a lagging indicator of economic recovery, meaning that the economy will show improvement long before unemployment falls to acceptable levels. But the recovery is not gaining strength, either.

Gross Domestic Product was revised downward to 3.0 percent in the first quarter of 2010 from 5.6 percent in the fourth quarter of last year, supporting the idea that unemployment will continue at high levels for a long time. The lower GDP shows “that the recovery in the biggest economy in the world may not be as strong as many have expected,” according to analyst Anna Fedec. The downward revision in GDP “came from consumer consumption and business spending which are required components for growth to be called sustainable,” she said. “In fact, consumer spending, which is vital in elevating production levels, is weak, mostly due to [the] high unemployment rate.”

Unemployment is the most important thing on the minds of most Americans, and it also plays a role in stifling the recovery. People without jobs spend a lot less than people with jobs, and with demand for products and services reduced by high unemployment, new job creation also will languish.

Add to that scenario the fact that the Obama administration’s policies discourage job creation by keeping businesses wondering what tax, expense or government edict is going to be imposed on them next. This uncertainty breeds caution, and caution and uncertainty do not produce jobs.

A look at business cycle history shows that if left alone economic downturns self-correct rather quickly, and that includes every downturn up to 1930, at which point federal government bureaucrats and elected officials decided they knew more about business than business people. That was the blunder that created the Great Depression, and it is the blunder in this recession. Nobel Prize-winning economist Friedrich Hayek called such bureaucratic arrogance the “fatal conceit.”

Following Jimmy Carter’s disastrous economic policies in the late 70s, Ronald Reagan turned things around by cutting taxes. Economist Arthur Laffer points out that the. Reagan tax cuts – which were the engine of the 1983 expansion and unleashed the longest peacetime expansion the U.S. economy has ever experienced – are the mirror image of the Obama tax increases. And he said “the prospect of rising prices, higher interest rates and more regulations next year will further entice demand and supply to be shifted from 2011 into 2010.” Mr. Laffer predicts that economic activity shifted to 2010 helps this year, but will produce an economic collapse next year. “If you thought deficits and unemployment have been bad lately, you ain't seen nothing yet,” he said.

The Obama administration has failed to learn the lessons of 1930 and 1983, to our great detriment.

Cross-posted from Observations

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