How This Economy Recovery Stacks Up

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
October 26, 2010

IN THIS ISSUE:

1. Comparing This Recovery With Previous Rebounds

2. Putting Obama’s Record Spending in Perspective

3. My Two-Cents Worth on the Upcoming Elections

Introduction

Officially, the so-called “Great Recession” of 2007-2009 was the worst economic slump since the Great Depression, thanks in large part to the credit crisis and the housing implosion. Much has been written about the Great Recession, including numerous analyses by your editor in these pages over the last couple of years.

What has not been written about nearly so frequently is how this economic rebound, since the recession officially ended in June 2009, is also the weakest recovery since the Great Depression. I ran across a series of charts that graphically depict how weak this recovery is compared to the previous worst recessions of 1973-75 and 1981-82. I’ll share those charts as we go along.

One of the top concerns among Americans is the explosion in federal debt, especially in the last couple of years as we have run back-to-back trillion-dollar-plus budget deficits, with more on the horizon. Yet there are those like Nobel Prize winner and New York Times columnist Paul Krugman who believe the government has not spent nearly enough. I’m not kidding.

As a result of this type of thinking, I will bring you some new statistics that put our runaway federal spending and debt in a clearer perspective. For example, President Obama increased spending by over $1 trillion (or 34%) in 2009 alone. And the deficit was another $1.3 trillion for fiscal 2010. How can anyone say Obama is not spending enough?

At the end, I will provide a few thoughts on the upcoming mid-term elections. Some of the races are tightening as we get closer, which is giving some Democrats hope. But the number of seats “in play” continues to increase. NBC News and others now admit that there may be 100 or more House seats up for grabs next Tuesday. It should be a very wild night!

Finally, in last week’s E-Letter I warned you not to forget about Obama’s Debt Commission that is trying to find a way to balance the federal budget by 2015. The Wall Street Journal reported yesterday that the Debt Commission is considering eliminating: 1) the home mortgage interest deduction; 2) the child tax credits; 3) the ability for employees to pay their portion of health insurance with pre-tax dollars; and 4) cutting defense spending. I have a link to this story at the end.

Comparing This Recovery With Previous Rebounds

According to the National Bureau of Economic Research – the official arbiter of when recessions begin and end – the Great Recession began in December of 2007 and ended in June of 2009. By many measurements, it was the worst recession since the Great Depression.

Actually, there were several worse economic slumps in the period prior to the Great Depression, the most notable being October 1873 to March 1879 when the economy contracted for 65 months, and March 1882 to May 1885 when the economy fell for 38 months.

Yet if we keep our sights on the post-Depression era, the Great Recession was the worst. Prior to the 2007-2009 recession, the worst previous slumps were in 1973-75 and 1981-82. The 2007-2009 recession was exacerbated by the housing slump and the resulting credit crisis.

The question on most Americans’ minds is, why is this economic recovery so tepid? The economy rebounded very powerfully immediately after the prior recessions of 1973-75 and 1981-82. With that question in mind, let’s look at a series of charts I ran across last week (thanks to John Merline of AOL).

Post-recession GDP growth

The chart above shows the rate of economic growth in the five quarters after these three recessions ended. Clearly, the current recovery is the worst of the three.

Post-recession unemployment rate

This chart shows the unemployment rate in the 15 months after each of these three recessions ended. You might remember that President Obama promised that if we passed the $800 billion-plus stimulus package in 2009, the unemployment rate would not rise above 8%. Yet it rose to 10.1% and remains at 9.6%.

Post-recession average unemployment length

This chart shows the average length of unemployment in the 15 months after each of these three recessions ended. The average person who lost his/her job during the Great Recession suffered for over two years before finding another job, if at all. And let’s not forget that there were 14.8 million Americans who were still unemployed at the end of September, along with another 6.1 million who have given up looking for work or are under-employed who are no longer counted in the official unemployment rate.

Post-recession Consumer Confidence Index

This chart shows the Consumer Confidence Index in the 15 months after these two recessions ended. (Data for the post-1974-75 recession were not available.) As I discussed at length last week, consumer confidence never got much of a bump up in this recovery and now appears to be trending lower again.

Post-recession monthly federal deficit

This chart shows the monthly federal budget deficit in the 15 months following these two recessions. (Data for the post-1974-75 recession were not available.) Notice that in many of these data points, the monthly federal deficit was in excess of $100 billion, and in one month, it was in excess of $200 billion.

Hopefully, the charts above help to put this anemic economic recovery in some better perspective. They may also help to explain why most forecasters are dialing back their economic projections for 2011.

At the end of the day, the question is: When will economic growth get back to normal? As I reported last week, the consensus forecast for 50 leading economists and analysts is that GDP growth next year will average only 2.5%. And as I pointed out, that may well be optimistic.

Putting Obama’s Record Spending in Perspective

Contrary to what many Americans and most of my clients believe, there are a number of highly respected analysts that believe the US economy and financial system had to have a massive government stimulus to avoid another depression in 2008 and 2009. Even the respected Bank Credit Analyst agreed that the US economy needed a big government stimulus to get us through the credit crisis and avoid a depression.

Back in late 2008 when President Bush and Treasury Secretary Hank Paulson announced their $700 billion TARP program, my eyes rolled back at the enormity of the number, but at least it was a loan program, not a government giveaway. And most of that TARP money has been paid back, with interest.

President Obama’s $800+ billion stimulus program, on the other hand, was a massive government giveaway that was very unwisely spent, in my opinion, and was never designed to be paid back. And yet there are some like New York Times columnist Paul Krugman who argue that the government has not spent nearly enough to get the economy back to normal.

As you can see in the table below, federal spending increased over $1 trillion (or 34%) in 2009, President Obama’s first year in office. Part of the reason for that huge increase was Obama’s $800+ billion stimulus package, not all of which was spent in FY 2009.

Fiscal Year	Federal Spending	Deficit

2008	$2.98 trillion	$458 billion
2009	$3.99 trillion	$1.4 trillion
2010	$3.59 trillion	$1.3 trillion
2011	$3.61 trillion	$929 billion (est.)*

* With the automatic annual spending increases in so many federal programs, the budget deficit in 2011 will also be above $1 trillion, not the CBO estimate shown above based on projections that are very likely too optimistic.

The 34% increase in federal spending in 2009 was the largest (in percentage) since 1952. Even between 1932 and 1941, during the depths of the Great Depression and before preparation for World War II began, Franklin Delano Roosevelt raised federal spending by more than 34% only once, in 1934. In that year, federal spending increased by 42% in a failed attempt to bring down a national unemployment rate of 21.7%.

In 1934, federal spending only amounted to 10.5% of gross domestic product. By contrast, with less than half of FDR’s unemployment problem, federal spending as a percentage of the economy surged to an estimated 24.4% in 2010 (from 21.1% in 2008). Spending for all governmental levels (federal, state and local) is running at 42.7% of GDP in 2010, up from 36.4% only two years ago. But that’s still not enough for Mr. Krugman.

Krugman argues that the size of government has remained relatively flat over the last decade. What we don’t know is whether he is referring to the number of federal employees or the level of federal spending. In either case, he is wrong! As illustrated in the table above, federal spending continues to explode, rising by a whopping 34% in 2009 alone.

As for the number of federal employees, President Obama’s proposed federal budget for 2011 noted that the size of the government (not including postal workers) will grow to 2.15 million full-time employees this year, topping 2 million for the first time since President Clinton declared that “the era of big government is over” and joined forces with a Republican-led Congress in the 1990s to pare back the federal work force.

What Mr. Krugman also does not take into account is that there are millions of private contractors that the government uses to outsource many projects. According to a New York University study, the number of private contractors working for the government rose from 4.4 million in 1999 to 7.5 million by 2005. We can only imagine what the number is today.

Krugman also does not, apparently, take into account the multitude of new government agencies that will be created in the next several years to implement ObamaCare and the financial regulatory reform hierarchy. You may recall that the new healthcare law calls for an additional 16,000 IRS agents be hired to enforce the mandate that everyone must buy healthcare insurance or face a fine.

I enjoy reading Mr. Krugman in moderate doses; he keeps me informed on how those on the left are thinking. But when he argues that the government is too small and doesn’t spend enough, I have to take issue with him. Apparently, most Americans agree with me based on the mid-term election polls.

My Two-Cents Worth on the Upcoming Elections

As this is written, Democrats are taking heart that some of the key races are tightening in their favor, which is normal as Election Day closes in. On the other hand, when left-leaning NBC News and others project that at least 100 House seats are now “in play,” as they did last week, you can bet next Tuesday will be a big win for the Republicans.

So, yes, some of the races are tightening, but the number of seats in play continues to rise. More and more supposedly “safe seats” could now go either way.

Normally, in past national election years, we have devoted this “week before” E-Letter to a rather lengthy analysis of the key races, and some specific predictions that I formulate along with my in-house political guru, Spencer Wright. Yet with virtually every poll suggesting a Republican landslide next Tuesday, we figured you’ve probably heard enough about the elections.

I will note that there is one thing that concerns me about this particular election. Voters across the country appear to be set to throw a lot of sitting Democrats out of office in favor of the Republican alternatives. But even if the Republicans win control of the House and the Senate, how much can they really do to turn this economy around and significantly lower the unemployment rate?

Virtually all of the forecasts I read suggest that there are no quick fixes, and that the economy will remain sluggish in 2011. Likewise, few expect the unemployment rate to fall below 9% next year. And no one knows how much things might improve in 2012, if at all.

Then there is the fact that President Obama can (and I believe will) veto any legislation the Republicans pass that he opposes. So what happens if the next two years go by and the economy is not significantly better by the elections in 2012? Could the pendulum swing back the other way again? We’ll see.

Finally, I have included below a link to a very good (as usual) column written last Friday by Peggie Noonan, with her thoughts on how the mood of the country has come to this point, and how the Tea Party saved the GOP. Political talking heads tell us that if the Republicans win big next Tuesday, it will be because of “anti-incumbent” fervor. And that is part of it.

But I happen to believe that it’s also very much about “anti-Obama” fervor, although he will never admit it. So, it was nice to see that Ms. Noonan agrees with me. She closes her piece as follows:

“This election is about one man, Barack Obama, who fairly or not represents the following: the status quo, Washington, leftism, Nancy Pelosi, Fannie and Freddie, and deficits in trillions, not billions.

Everyone who votes is going to be pretty much voting yay or nay on all of that. And nothing can change that story line now.”

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Peggy Noonan – Tea Party to the Rescue
http://online.wsj.com/article/SB10001424052702304023804575566503565327356.html

Debt Commission: Key Tax Breaks at Risk
http://online.wsj.com/article/SB10001424052702304354104575568643889337142.html?KEYWORDS=debt+commission