08 Jul 2011 We Are Waiting
Last week’s Brief posed a question within a question. First, has the US economy hit a temporary slow patch or is a prolonged slowdown looming? The question within is general and aimed at the cause of the latest slowdown. Answers include; disruptions in Japanese supply lines caused initial slowing; a retreating European economy, driven by debt concerns, further reduces demand for American goods and services, and emerging markets such as China, Brazil, and India are slowing their demand for US exports as their central banks attempt to rein in skyrocketing inflation.
But there is a much larger question, a $14.5 trillion question. In this writer’s opinion the answers to this question will do far more for this recovery than anything else. How exactly will the US government deal with skyrocketing debt, entitlement spending, Middle Eastern wars, regulations, and taxes? Until businesses see a clear, long-term blueprint of what it looks like to business in this country (regulations, taxes, and benefits) they simply will not invest in capital or labor at the levels required to put this economy back on a sustainable rate of growth; one that reduces unemployment and raises standards of living, let’s call it 3.5% or higher.
Case in point: Today’s employment report is awful. The headline number increased from 9.1% to 9.2% as the economy added the fewest workers in nine months. It marks the second month of essentially no growth in employment. Nonfarm payroll employment increase in June by only 18,000 workers and follows a 25,000 increase in May. Back in the go-go 90’s numbers of this size were being announced daily by companies like Intel, Cisco, Boeing, and GE as they opened new plants. To make matters worse, April and May payroll numbers were revised down by a net 44,000.
Comments made today by House Speaker John Boehner regarding negotiations on the $14.5 trillion question stand in stark contrast to a more sanguine outlook presented by Mr. Obama in the last few days. Boehner said that no agreement with Democrats is “imminent” and he didn’t see differences between the two parties narrowing in recent days. According to the Wall Street Journal he emphasized there was no deal between him and the president “in public or private.” Yesterday, Mr. Boehner told a meeting of House Republicans that he saw the chances of an agreement being reached by the end of the weekend standing at 50-50. Congress faces an Aug. 2nd deadline to raise the country’s $14.29 trillion statutory borrowing limit to avoid the potential of a US credit default. Both parties’ leaders have agreed that no increase is likely without substantial spending reductions to try to rein in burgeoning federal budget deficits.
Stock analysts say that US corporations will likely report the slowest earnings gains since the recession ended. The second quarter, ended June 30th, likely saw earnings rise by 13%. Corporate earnings increased 18% in the first quarter of 2011 and 37% for all of 2010. The declines are due to a number of factors including supply disruptions from Japan, significantly higher commodity prices (especially oil), and a significant drop in consumer spending (also due to higher oil and gasoline prices). Europe’s corporate earnings are also slowing. Earnings in the Stoxx 600 Europe Index may rise 21% this year after gaining 63% in 2010, according to Bloomberg data.
On a positive note, manufacturing, which has sustained the recovery since its beginning, saw a solid bounce of 0.8% in May which follows a 0.9% drop in April. According to Bloomberg, the data are split between durable goods and non-durable goods, with new orders on the durable side coming from aircraft and motor vehicles. Non-durable goods are especially sensitive to price changes such as the recent dip back for energy prices. Indications are that June’s manufacturing data are more mixed according to regional readings.
Also positive, Warren Buffet said on Bloomberg news “I would bet very heavily against [a double dip in the economy]. How fast the recovery will come, I don’t know. I see nothing that indicates any kind of a double dip.” When asked about today’s bad unemployment news he said “it means that we’re still a ways off from getting to where we should be.” He said that jobs come from demand and that Berkshire is seeing growth around the world, but “it’s not mushrooming.”
‘Not mushrooming’ may very well precede declining, as some indicators are suggesting. Just as there is no denying that jobs come from demand, demand comes from confidence. As consumers and businesses feel more confident about their future income and profits they will demand more in the goods and services they need to invest in their future. When we get real (long-term, not quick-fix) answers to how our policy makers intent to address the tough questions like skyrocketing debt, entitlement spending, Middle Eastern wars, regulations, and taxes, then we will see this economy take off again like the world leader it is.
And speaking of leadership; Mr. Obama, Mr. Boehner, and Mr. Reid, you have it within your reach and power at this unique moment in history to make one fine first installment toward our comeback plan. Do something truly novel and lead like patriots, guided by morals, principles, common sense, and less by politics. Abandon the kinds of social ‘change’ that are daily being proven false by Greece, Italy, Spain and other socialist economies. Return to the basic principles of free-enterprise and competition while addressing and regulating the propensities of men individual and corporately to overreach.
As a nation, we have managed to survive numerous impassioned ideological divides; such as states’ rights vs. federalism (from the very beginning), slavery, integration, wars, and on and on.
Ideology seems to drive our leaders further apart every day. Our real-time access to them made possible by ubiquitous media explains a lot of the problem. Otto von Bismark said “laws are like sausages, it is better not to see them being made.” Every word uttered by our leaders draws immediate and fierce outcries from some offended segment of society. Leaders are rendered impotent, to the extent they play along. Guys, close the doors and get it done! Perhaps more words from Otto will help you: “There is a Providence that protects idiots, drunkards, children and the United States of America.”
Have a nice weekend.