GDP Report Tanks – Is A Recession Looming?

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
February 5, 2013

IN THIS ISSUE:

1. Goldman Sachs Issues Upbeat Report on USA

2. US Economy Disappoints in the 4Q

3. Fed Sets Record Straight – More QE

4. Pew: Government Threatens Personal Rights

Overview

We will cover a lot of ground today. We begin with a new report from Goldman Sachs which argues that the US economy will remain the strongest in the world for many more years. The report rebuts claims that America is a nation in decline. Quite the contrary, say Goldman analysts who claim that there is a growing “awareness of the key economic, institutional, human capital and geopolitical advantages the U.S. enjoys over other economies."

This rosy report from Goldman Sachs flies in the face of other predictions from respected sources that say the US faces another financial crisis in 3-5 years as I reported last week. Apparently, the analysts at Goldman don’t find it scary that our federal debt is exploding. We will look at some of the details from the Goldman Sachs report below.

The upbeat Goldman report was delivered before last Wednesday’s shocking news that the US economy actually declined in the 4Q for the first time since 2Q 2009. While there are reasons to believe that the advance estimate of 4Q GDP (-0.1%) will be revised upward in subsequent reports, the surprise GDP report was not the only bad news in the last few weeks. We’ll take a look at the latest economic reports as we go along today.

From there, we turn our eyes to the Fed. In December, there were rumors that some members of the Fed Open Market Committee were having doubts about the Fed buying a record $85 billion a month in bonds and mortgages indefinitely. Some even predicted that the FOMC might vote to end such purchases by the end of this year.

Those rumors were wrong. At its first policy meeting of the new year, the FOMC made it clear that it will continue the $85 billion in monthly purchases until the unemployment rate falls to 6.5% or below. That news sent stocks soaring once again.

Finally, we look at a new poll from Pew Research Center which found – for the first time ever – that a majority of Americans believe that the government is a threat to personal rights and freedom! I will summarize this new poll which is loaded with interesting data.

Goldman Sachs Issues Upbeat Report on USA

I am occasionally criticized for being too negative on the state of affairs in America ranging from moral decay to the left-leaning electorate to the sub-par economy and certainly to the explosion in our national debt. My conclusion has been that the country is on the road to ruin, and it’s only a matter of time before it happens.

In last week’s E-Letter, I pointed out that The Bank Credit Analyst predicted that the US will hit the proverbial “debt wall” within the next five years at the latest, and perhaps as early as three years from now. With the exception of our politicos in Washington and liberal pundits such as Paul Krugman, most everyone knows that our federal debt trajectory is unsustainable.

But what if we’re wrong? What if America is not “going to Hell in a hand-basket” as many like to say? What if America’s best days lie ahead? Who thinks that?

In a recent report to clients, analysts at Goldman Sachs argue that the United States still has the world’s strongest economy - and will have for years. There is a growing “awareness of the key economic, institutional, human capital and geopolitical advantages the U.S. enjoys over other economies,” contend Goldman's analysts.

As proof, they deploy voluminous facts. For starters, the US economy is still the world’s largest by a long shot. Our Gross Domestic Product is almost $16 trillion, “nearly double the second largest (China), 2.5 times the third largest (Japan)." Per capita GDP is about $50,000; although 10 other countries have higher figures, most of the countries are small such as Luxembourg.

[Per Capita GDP is a measure of the total output of a country that takes the gross domestic product and divides it by the number of people in the country. The per capita GDP is especially useful when comparing one country to another because it shows the relative performance of the countries. A rise in per capita GDP signals growth in the economy and tends to translate as an increase in productivity.]

Next, Goldman points to our surplus of natural resources. In a world ravenous for food and energy, the United States has plenty of both says Goldman. Our arable land is five times China’s and nearly twice Brazil’s. The advances in "fracking" and horizontal drilling have opened vast natural gas and oil reserves that, until recently, seemed too expensive to develop. The International Energy Agency predicts that the United States will become the world's largest oil producer - albeit temporarily - by 2020.

In turn, the oil and gas boom bolsters employment. A study by IHS, a consulting firm, estimates that it has already created 1.7 million direct and indirect jobs. By 2020, there should be 1.3 million more energy jobs according to IHS. Secure and inexpensive natural gas also encourages an expansion of US manufacturing, Goldman argues. That’s another plus.

Poorly skilled workers are often counted as a US economic liability. Goldman sees it differently. American workers will remain younger and more energetic than their rapidly aging rivals. By 2050, workers’ median age in China and Japan will be about 50, about 10 years older than the median age in America. Moreover, the United States attracts motivated immigrants, including “highly educated talent.” A Gallup survey of 151 countries found the United States was the top choice for those wanting to relocate, at 23%. The next highest was the United Kingdom at only 7%.

Finally, Goldman expects the United States to remain the leader in innovation. America performs the largest amount of research and development (31% of the global total in 2012) and has more of the best universities (29 out of the top 50, according to a recent British ranking).

Up to a point, this is convincing. America’s strengths have been underestimated. Compared with Europe and Japan – the world’s other enclaves of affluence – our prospects are brighter. But the Goldman report, which advises investors where to put their money, is an incomplete guide to the future. It may explain why US stocks have recovered to near pre-crisis records, but it does not dissuade the widely-held view that America is a “nation in decline.”

Think of that old saying: the best horse in the glue factory. That may be the situation America finds itself in today, what with our national debt surging above $16 trillion. Or think of it this way: If your neighbor’s house burns down and only half of yours does, you are relatively better off than your neighbor – but you’re much worse off than you used to be.

It's in that sense that America’s prospects exceed Europe’s and Japan’s. But this advantage doesn’t erase the huge economic losses suffered by millions of Americans. There are still eight million fewer people in the US workforce than before the financial crisis of 2007-2009. The mainstream media never acknowledges this fact, but it’s true.

Look at the number of young people who are unemployed or under-employed. The unemployment rate for “millennials” (ages 18-29) is around 13%, the highest since WWII. According to Census Bureau data, about 25% of millennials still live with their parents or relatives, also the highest level since WWII.

Then there is the entitlements crisis. More Americans are on welfare than ever before. More people get food stamps than ever before – a record 47 million people as of the end of September last year – double the amount from a decade earlier. I could go on but based on these metrics, most Americans reasonably conclude that our country is in decline.

US Economy Disappoints in the 4Q

Gross domestic product was expected to be weak in the 4Q, but no top economist thought that the change from the 3Q (+3.1%) would be negative. None of the 24 economists surveyed for the Dow Jones consensus estimate forecasted a negative growth rate. The median expectation was for 1% growth in the 4Q with estimates ranging from 0.3% to 2%.

The actual number from the Commerce Department last Wednesday was -0.1% (annual rate) for the 4Q. The big surprise in the report was a 22.2% plunge in defense spending in the 4Q. Had it not been for the decline in defense spending, GDP would have been +1.27. While there are reasons to believe that the advance estimate of 4Q GDP (-0.1%) will be revised upward in subsequent reports, the surprise GDP report was not the only bad news in the last few weeks.

The unemployment rate in January ticked up to 7.9%. The economy added 157,000 new jobs (about average), but because more people were actively looking for work in January, the headline rate went up slightly. The new jobs numbers for November and December were revised up significantly.

Consumer confidence unexpectedly plunged in January. The index fell from 66.7 in December to 58.6 in January. This was far below the pre-report consensus of 65.1. The Conference Board which maintains the index summarized the report as follows:

“Consumer Confidence posted another sharp decline in January, erasing all of the gains made through 2012. Consumers are more pessimistic about the economic outlook and, in particular, their financial situation. The increase in the payroll tax has undoubtedly dampened consumers’ spirits and it may take a while for confidence to rebound and consumers to recover from their initial paycheck shock.”

On the bright side, durable goods orders rose a better than expected 4.6% in December. Retail sales rose 0.5% in December, also better than expected. Industrial production rose 0.3%. Housing starts were also above expectations at 954,000 units in December.

The disappointing 4Q GDP report led many investors to wonder if we are headed into a new recession. Recessions are generally defined as two or more consecutive quarters of negative GDP, and some worry that we could be back in a recession if 1Q GDP is also negative.

However, as noted above, the 4Q GDP report will be revised two more times just ahead, and most economists believe those revisions will lift the number slightly into positive territory. Most forecasters are predicting 1-2% GDP growth in the first half of this year.

With $16 trillion in debt, a recession could unfold just about any time, but I don’t see it coming in the first half of the year.

Fed Sets Record Straight – More QE

In December, there were rumors that some members of the Fed Open Market Committee (FOMC) were having doubts about the Fed buying a record $85 billion a month in bonds and mortgages indefinitely. Some even predicted that the FOMC might vote to end such purchases by the end of this year.

The Fed’s balance sheet is approaching $3 trillion now and could swell by another $1 trillion this year. Fed Chairman Bernanke believes that this unprecedented buying by the Fed will help push intermediate and long-term interest rates down, and therefore help the economy. Of course, there is widespread disagreement about the latter.

The Fed wrapped up its first FOMC meeting of 2013 last Wednesday. The policy statement released after the meeting made two things very clear. First, the Fed is clearly concerned about the slowdown in the economy in the 4Q. The statement noted that the inflation rate is running below expectations and hinted of disinflation.

Second, the statement once again made it clear that the Fed will continue its monthly purchases of $40 billion in mortgage-backed securities and $45 billion in longer-term Treasuries indefinitely, or at least until the unemployment rate falls to 6½%. Many forecasters believe that could mean another two years of Fed purchases.

The FOMC voted 11-1 in favor of continuing the $85 billion in monthly securities purchases. So despite rumors to the contrary, the Fed has no plans to halt these purchases… for better or worse.

Pew: Government Threatens Personal Rights

Even though President Obama was re-elected, trust in the federal government remains mired near a historic low, while frustration with government remains high. And for the first time, a majority of the public says that the federal government threatens their personal rights and freedoms.

The latest national survey by the Pew Research Center, conducted January 9-13 among 1,502 adults, finds that 53% think that the federal government threatens their own personal rights and freedoms while 43% disagree.

In March 2010, opinions were divided over whether the government represented a threat to personal freedom; 47% said it did while 50% disagreed. In surveys between 1995 and 2003, majorities rejected the idea that the government threatened people’s rights and freedoms.

Majority Now Views Government as Threat to Personal Rights

The growing view that the federal government threatens personal rights and freedoms has been led by conservative Republicans. Currently 76% of conservative Republicans say that the federal government threatens their personal rights and freedoms, and 54% describe the government as a “major” threat. Three years ago, 62% of conservative Republicans said the government was a threat to their freedom; 47% said it was a major threat.

By comparison, there was little change in opinions among Democrats; 38% say the government poses a threat to personal rights and freedoms and just 16% view it as a major threat.

The survey found continued widespread distrust in government. About a quarter of Americans (26%) trust the government in Washington to do the right thing just about always or most of the time; 73% say they can trust the government only some of the time or that they can never trust the government.

Just 20% of Americans say they are basically content with the federal government; 58% say they are frustrated while 19% say they are angry. For the most part, these views have changed little during Obama’s presidency. However, the percentage saying they are content with government sank to a low of just 11% in August 2011, following protracted negotiations between the president and congressional leaders over raising the debt ceiling.

Finally, opinions about Congress, while little changed over the past year, also remain very negative. As shown in the chart above, just 23% offer a favorable opinion of Congress, while 68% express an unfavorable view. Favorable views of Congress hit 50% in spring 2009 but subsequently have plummeted.

For two decades between 1985 and 2005 Congress was generally viewed more favorably than unfavorably. The low point during that period came in the fall of 1995 – just prior to the government shutdown of that year – when 42% offered a favorable opinion of Congress.

Not anymore!

Best regards,

Gary D. Halbert

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