Obama's recovery has failed
Yes, the recession ended, but the pace of the recovery has been slow and now it's stalling out. Where next? No one in Washington, including the president, seems to know.
It wasn't supposed to end like this.
When President Barack Obama came into office on a whirlwind of popular support in 2009, hopes were high his proactive, government-centric approach to the economy would stem the housing crisis, save the banks and reverse the jobs implosion that resulted in 11.3 million full-time positions being lost between 2007 and 2009.
His left-leaning economic advisors touted the lessons of the Great Depression and were eager to apply those lessons after eight years of the Bush administration's more laissez-faire approach. They bailed out Detroit. They used Treasury funds to encourage mortgage modifications. They launched a $762 billion stimulus package. They used the Federal Deposit Insurance Corp. to backstop bank assets.
And they encouraged the Federal Reserve to open the spigots of cheap money on an unprecedented scale, subsidizing the government's $1 trillion-plus deficits, and buying auto loans, collateralized consumer loans and mortgages.
Yes, the economy started growing again. But the results have been disappointing. And now, there are signs this tepid recovery is faltering as both economic growth and corporate profitability turn lower.
We've seen the weakest recovery of the modern area, with annual growth rate of gross domestic product peaking at a meager 2.8% in 2010 before slowing (compared with a Bush-era peak of 4.1%, and a peak of 5.4% under President Bill Clinton). The economy remains far below its full potential. Industrial production remains below pre-recession levels. And we're still facing a deficit of nearly 6 million full-time jobs -- and nearly 13 million if we account for population growth as well as jobs lost during the recession.
Anthony Mirhaydari
Despite the lingering morass, according to a snarky new report by the Government Accountability Institute (.pdf file), a think tank that frequently takes aim at Obama, the president has spent more than twice as many hours playing golf and enjoying vacation as he has working on the economy (976 hours versus 474 hours). Through March 31, the report says, he's spent just six hours this year on the economy versus nearly 50 hours on golf or vacation. Question that if you like, but it seems clear to me he's focused on other issues.
Mr. President, it's time to get serious about the economy again. Here's why, along with an idea of where he can get started.
The beginning of the end
Both earnings and the economy are stalling. I've been talking about the deteriorating economic situation for months, with businesses scaling back spending and hiring as profit margins are squeezed, cash flow dwindles and confidence wanes, while consumers contend with higher taxes, lower savings and the looming impact of the budget sequester cuts.
This is in the context of an economy that's running well below its pre-recession potential, according to the Congressional Budget Office, as shown below. Until this gap is closed, we haven't fully healed.
The details of Friday's first-quarter GDP report, which showed below-consensus growth at a 2.5% annualized pace, illustrate the problem. The report was bolstered by two temporary factors.
The first was a building of private inventories on a scale not seen since 2011. And the other was a massive 1.5% contribution (of the 2.5% total) by personal spending on services -- an area of the economy that has lagged behind throughout the recovery as people cut back on nonessentials. But now, all of the sudden, it has made the largest contribution to growth since 2004.
And this spending spree came in the context of a severe drop in inflation-adjusted, after-tax income that resulted in a similarly steep drop in the personal savings rate as consumers were forced to draw down meager reserves to maintain spending. In other words, it's not sustainable.
That suggests that, correcting for these two temporary items, the economy's true growth rate is nearer to 0.7% a year -- just a slight improvement from the 0.4% pace seen in the fourth quarter of 2012.
Here's the kicker: All four sectors of GDP growth are set to weaken from here. Business investment will keep pulling back as net cash flow growth drops to pre-recession levels. Consumers will be forced to cut spending as savings run dry. Net exports will suffer from the deepening recession in Europe. And government spending will tighten further as the debt-ceiling fight heats up, Washington debates a new budget, and as policy experts at the Committee for a Responsible Federal Budget call for an additional $2.5 trillion in budget cuts over the next 10 years to merely stabilize the national debt.
(The one bright spot has been housing construction, but it's improving from such low levels as to have barely an impact on the other negatives.)
Don't believe me? Consider that manufacturing activity in the Chicago area is now contracting on a month-over-month basis. Order backlogs have plummeted to recessionary levels last seen in July 2009. Or that the Federal Reserve Bank of Dallas regional manufacturing index, shown below, suffered its largest drop and its largest miss versus estimates ever this week as producers cut back work hours in response to a weakening outlook.
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