Posted by Michael A. Kamperman on October 4, 2009
Vice President Joe Biden has been the Whitehouse’s point man on implementing and defending the failed stimulus bill. After Friday’s unemployment report he bailed on being the sacrificial lamb for the President’s political and economic advisers. He said “We don’t think that ‘less bad’ is good. ‘Less bad’ is not our measure of success. One job lost is one job too many, and it’s still too much pain. That is not what the American people were promised.” How could he possibly defend the stimulus bill or the other economic programs as working in light of Friday’s unemployment report? It was so bad the government itself lost 53,000 jobs. There were 15,000 teachers who were not returned to the classroom. The stimulus bill is not only failing to create jobs, it now not even saving the jobs of state and local government employees, or even teachers. Financial support for state and local governments and for schools was a key component of the stimulus bill. But stimulus support from the federal government is simply insufficient to make up for the lost tax revenues the states are experiencing. State governments are being forced to either raise taxes or cut spending. In many cases they are doing both. This is precisely the wrong response to dealing with a severe economic contraction in the private economy. Total tax revenues from all sources fell by double digits in 39 out of 50 states in the second quarter of 2009 compared to the second quarter of 2008. The economic contraction is so severe that sales tax revenues in all of the states fell by 9%. There is no better measure of consumer spending than sales tax revenues.
The cause of continuing job losses is not the stimulus plan. There is no doubt things would be even worse if nothing were done. But we need Washington to succeed in solving problems and not just say at least we tried. The real reason we are still hemorrhaging jobs is the stress test of the banks. Treasury Secretary Timothy Geithner supported Wizard of Oz style smoke and mirrors over the politically painful steps of fixing the broken credit markets. He should have created a “bad bank” to absorb the toxic assets, he didn’t. He doesn’t even want to encourage the FDIC to borrow money directly from the Treasury now that it is obvious it is broke, even though the FDIC has a $500 billion unsecured line of credit already set up with the Treasury. Remember, the stress test’s worse case assumption was that unemployment would not rise above an average of 8.9% in 2009. If not for removing 1.5 million people from the labor force the unemployment report would have already reached 11%. The banks cannot side step the fact that the real unemployment rate is much higher than the stated unemployment rate. People without jobs cannot pay their debts no matter how the statisticians in Washington categorize them. The losses at the banks will be much higher than the worst case scenario modeled by the Treasury. Therefore, they do not have enough capital and that is the reason they are not lending. Zombie banks do not lend.
The creative destructionist on the Fed and the liquidationists in the Obama Whitehouse are reaping what they have sown. The Whitehouse and the Fed have been talking tough on the need to reign in the deficit. The Fed has been talking tough about rapidly withdrawing monetary support to prevent the return of inflation. The Fed is concerned about the appearance of their independence. What the Fed should be concerned with is they are talking about withdrawing monetary support when they should be talking about adding it. They will add it. The Fed will back pedal and up its quantitative easing program. This reminds me a lot of August of 2007 when the Fed met in the first week of August and refused to lower interest rates. Less than three weeks later they started cutting rates drastically in an emergency session. The unemployment report and the state sales tax reports are better indicators of future Fed policy than tough talk. The Whitehouse has no political option but to back pedal come forward with a real job creation plan. Even the New York Times has turned against the President and his economic policies. Here is what the Times said in its editorial this morning “If successful, ambitious goals like health care reform and energy legislation may generate jobs, but officials have not persuasively linked them to job growth. Congress and the administration also have not done enough to directly create jobs. That could be done with more stimulus to spur job creation, or a large federal jobs program, or tax credits for hiring, or all three. Or surprise us. Just don’t pretend that the deteriorating jobs picture will self-correct, or act as if it is tolerable.” Ouch! The talking heads on the Fed and in the Whitehouse look like economic fools. At least Joe Biden is done with being made to look like one.
Posted by Michael A. Kamperman on October 2, 2009
Today’s unemployment report was a cold slap in the face to those thinking the economy has turned the corner and an economic recovery is underway. The official unemployment report rose to 9.8% and the economy lost another 263,000 jobs. The real U-6 unemployment rate reached a stunning 17%. There are currently 6 times as many people unemployed as there are job openings. The work week fell again to 33 hours. Wages rose by only a penny. Once again the labor department reduced the number of people officially looking for work by over 500,000. Since the beginning of the summer the Labor Department has thrown 1.5 million people out of the Labor force because they are discouraged. If I were unemployed and had failingly searched in vain for a job for months and months I would be discouraged too. However, I would still be unemployed and should be counted in the statistics. Without these revisions the official unemployment rate would be 11%. The Department of Labor statisticians are providing cover to a weak kneed Congress and Whitehouse that want to continually insist all is well because of the stimulus plan. At this point even they don’t believe the spin they keep giving us. We need a real plan to create real jobs.
The key to creating jobs is to restore credit. In today’s Wall Street Journal influential banking analyst Meredith Whitney detailed how credit is tighter than ever to small businesses. According to Meredith the two key credit sources of small business creation are credit cards and home equity loans. Both have been slashed by the banks and Meredith contends the banks will cut credit card lending by well over another trillion dollars. Small businesses employ 50% of the workforce in the U.S. Additionally, they create most of the new jobs in America. We cannot restore the job creation machine until we fix the broken credit markets that provide credit to small businesses and consumers.
President Obama’s chief economic adviser is Lawrence Summers. Larry believes we have probably entered a recovery because that is what the vast majority of econometric forecasts are predicting. But these forecasts rely only on data inputs from the post World War II inflationary era and do not incorporate the economic data from the debt-induced deflationary depression of the 1930’s in their models. Hence, the models are unable to accurately predict the trajectory of the economy. We need an original thinker advising the President and not someone captivated by the tools of the modern day economist. The President’s other key adviser is Christina Romer. She is touting that the actions taken by the federal government to date have avoided the risk of entering a depression. Maybe she doesn’t bother to read the details of the unemployment report. Both of these individuals should be fired along with Treasury Secretary Timothy Geithner, who prefers smoke and mirrors like phony stress tests to concrete solutions like a “bad bank.” The President should hire Meredith Whitney. She may not know how to get us out of the depression, but at least she understands we are in one and understands why we are in one.
Posted by Michael A. Kamperman on October 1, 2009
The debate between most economists is whether we are in a V-shaped recovery or whether we will have a double dip W-shaped recovery. What recovery are they talking about? Yes, based on the flawed GDP calculation we probably have a positive reading in the third quarter. The final GDP report for the second quarter showed the economy only contracted at -.7% annualized rate. In the second quarter real U.S. exports to willing buyers fell by 4.1%. But because our imports fell 14% the GDP calculation claims that “net exports” added a positive 1.65% contribution to overall second quarter GDP. If the calculation simply used actual exports, then 2Q GDP would have contracted at -2.8%. The flaw in the GDP calculation has economists overstating the strength of the real economy. This morning weekly jobless claims rose to 551,000. This is higher than the highest week of jobless claims in either the 2001 or 1991 recessions. It has been over a year since we have had a weekly jobless claim number below the 2001 peak of 517,000. Can any sane person accept that we are in the middle of an economic recovery when the official unemployment report will soon reach 10%, possibly as soon as tomorrow?
Auto sales plummeted in September just as soon as the cash for clunkers program ended. The annual sales rate is once again well below 10 million units per year. Consider that September of 2008 was the worst month for auto sales since 1993. Yet the supposed recovery we are in saw Ford sales fall 6% from September of 2008, Toyota sales fall 13%, and GM sales drop by 45%. Does that look like a recovery to you? I look for home sales to follow auto sales into the ditch in October now that sales from the first time home buyers tax credit are behind us. Remember you have to close by November 30 and it is taking an average of 60 days to process a mortgage application.
Sales of autos and homes are big ticket items. Most buyers need both a job and access to credit to acquire either. With unemployment still rising and credit still tightening, it is unrealistic to believe the economy is in a full blown recovery. We need someone in Washington to show some leadership and come forward with a small business and consumer credit program. The Treasury and the Federal Reserve are too content to sit back and wait for the Zombie banks to heal. These banks are undercapitalized and they will not heal on their own. They are going to need more federal support. The housing market is going to need more federal support. The auto market is going to need more federal support. And the job market needs a lot more federal support.
