January 13, 2013
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August 12, 2010

Summer of No Recovery

By Alan Aronoff
Summer time, and the living is easy -- that is, if you are one of the 22.77 million people employed by the government, representing one out of seven people currently employed. If you are unemployed and hoping for an economic uptick to increase chances for employment, this may very well be your summer of discontent. In any event, the White House has designated the summer of 2010 the Recovery Summer.

If this is the Recovery Summer, then:

  • Why hasn't the National Bureau of Economic Research set a date for the end of the recession that began in December 2007 even though GDP growth had turned positive during the second quarter of 2009?
  • Why are U.S. light vehicle sales in June, at 11 million cars at an annual rate, the lowest rate for auto sales since February?
  • Why are housing sales weakening? Sales of existing homes in June fell by 2.6% from May. The National Association of Realtors Existing Home sales index was down 18.6% in June compared to June of 2009. Home sales in May fell 30% from April. April marked the end of a government incentive of providing up to $8,000 per home purchase. In many cases, the government subsidy served as the down payment.
  • Why is consumer confidence at 50.4 in July, which is down from 54.3 in June? During the recession of 2001, and immediately after 9/11, the index was above 80.
  • Why did the Wells Fargo/Gallup Small Business Index fall 17 points in July to an all-time low of -28?
  • Why do the job statistics for June still show a 9.5% unemployment rate? According to the Bureau of Labor Statistics, the labor force was reduced by 2.5 million workers and 2.7 million people have left the labor force.

Against this list of facts, President Obama claims that the economy is getting better. This administration's ineptness at promoting growth is equaled by its ineptness at spinning facts. The Obama administration also touts that the stimulus passed in February of 2009 created or saved 3.5 million jobs. Of course, the president has chosen a standard of measure that is not and has not been tracked before. Mr. Obama boasted, "The stimulus bill prevented the unemployment rate from getting up to ... 15%." Of course, not seeing 15% unemployment (unless you consider the underemployed in the U.S.) does not mean that the stimulus worked. The president could have also stated that passing the stimulus bill would prevent asteroids from destroying the earth. Just because the earth has survived does not mean that this result was due to the stimulus.

Few believe the economy is getting better and job growth is just around the corner. The table below from Business Insider (hat tip: Tom Sullivan Radio show) shows that the current recession has the deepest loss of jobs. At 31 months since the onset of the recession, there is no uptick in employment.




The reason for lack of economic performance in the U.S. economy was stated succinctly by Ben Bernanke in his July 22 testimony, where he stated that there is unusual uncertainty in the economic outlook of the U.S. The source of this unusual uncertainty is the pending changes in the structure American economy. These changes include:

  • Uncertainty in tax laws. The current federal tax rates are due to reset in January. Also, many states whose budgets are underwater are considering tax rate changes.
  • Uncertainty of the obligations on business from ObamaCare. As Nancy Pelosi stated, "We need to pass this law to find out what is in it." What Ms. Pelosi didn't say is that many of the rules in the 2,000-plus-page bill have yet to be written, and the final impact will not be known for some time. However, as the Missouri vote shows, most Americans think the costs of ObamaCare outweigh the benefits.
  • Uncertainty in the future cost of energy. The moratorium on deep-water drilling, coupled with the continuing attempt by Congress to pass energy cap and trade legislation, makes the future cost of energy uncertain. Energy consumption is directly correlated to GDP. Furthermore, increases in the cost of energy will reduce the competitiveness of American manufacturers.
  • Uncertainty in bank lending to private-sector business. The financial regulation bill recently passed will place unknown requirements on bank lending, as new capitalization rules have not yet been written. Also, with interest rates near zero, banks can borrow at the Fed discount window at near zero and lend that money to US treasuries - 10 year treasuries yielding at 2.82% providing a risk-free return.

On top of it all, the prime cheerleader for Obamanomics, Christina Romer, announced that she is leaving her position as the head of the Council of Economic Advisors to President Obama to return to teaching at UC Berkeley. Christina Romer and her husband have authored a paper that evaluates the effects of tax rates on GDP. A tax of 1% of GDP will have a negative effect on GDP growth larger than the tax increase. If Romer's research is correct, then allowing the Bush tax cuts to expire will cause a reduction in GDP growth compared to allowing the current tax rates continue.



There will be a Recovery Summer; unfortunately, it won't be the summer of 2010.
on "Summer of No Recovery"