Since January 2009 the U.S. economy has been mired in the weakest, most lopsided recovery on record since 1947. It has limped along the past three years in an historic stop-go trajectory, during which two brief, shallow recoveries of less than a year each were followed in the summer of 2010 and again in 2011 by two short economic relapses. Forty-five months after the start of the current recession in December 2007, the U.S. economy was no larger in terms of GDP than it was in late 2007. That is, the net growth of the economy after 45 months was 0 percent. This 0 percent net growth after 45 months compares especially poorly with recoveries from the two previous worst recessions in the U.S., 1973-75 and 1981-82. In the 1973-75 recession, 45 months after its start the economy had grown by 15.95 percent, or at a rate of 4.25 percent per year. In 1981-82, after 45 months the economy had grown by 13.65 percent, or at a rate of 3.64 percent per year.
After two weak recoveries in 2009 and 2010, and two subsequent relapses in 2010 and 2011, beginning last November 2011 the economy has been undergoing yet a third brief, shallow rebound. However, this current third recovery is limited once again and is being driven by forces that are temporary and cannot be sustained. The stop-go trajectory—characteristic of the U.S. economy since early 2009—has, therefore, not been fundamentally checked or reversed. The economy remains on a stop-go path that will experience yet another relapse, or possibly an even worse double dip, sometime no later than 2013—as this writer previously predicted last January.
The Obama recovery has not only been the weakest recovery on record, but has also been the most lopsided recovery of all the prior recessions since 1947. Lopsided means large corporations, their CEOs, bankers, professional speculators, and the wealthiest 10 percent households that do most of the investing in stocks and bonds have benefitted nicely. For the wealthiest few and their institutions, the current recession was historically short, V-shaped, and their recovery complete after barely a year.
Stocks and Bonds: For example, in the first year of recovery alon e the Dow-Jones index of U.S. stocks rose between June 2009-June 2010 more than 90 percent from its prior lows. The bond markets have done even better. After a 30 percent increase in returns in 2009, high yield corporate bonds returned an additional 57 percent in 2010. Compounded that’s more than 100 percent. Stocks and bonds have surged a second time since October 2011 and currently approach their record highs of 2006-07.
Corporate Profits: Corporate profits have done even better. Having experienced the fastest recovery in 31 years, corporate profits today are higher than they were since December 2007, prior to the start of the recent recession. The average annual rate of increased profits in the U.S. since 1948 has been around 10 percent. But pre-tax corporate profits nearly doubled in little more than two years, from their recession lows of $971 billion in December 2008 to $1.876 trillion by March 2011. By early 2012 they exceeded more than $2 trillion, well beyond their 2007 highs. Yet another way to look at profits is profit margins. Profit margins are defined as that percentage of revenue left over after expenses—i.e., profits as a percent of operating costs. While profit levels rose to their highest levels in 31 years, profit margins reached levels not achieved in 80 years. Record profit margins during the recession means cost cutting, largely at the direct cost of workers’ wages, jobs, hours of work, benefits, and the rapid productivity gains achieved after June 2009 that have not been shared by companies with their workers.
CEO and Executive Pay: After leveling off or slightly declining during the worst of the 2008-09 economic collapse, top U.S. executives’ paychecks rose 23 percent to $10.8 million in 2010 and 36 percent according to most recent estimates for the S&P 500 largest companies (by the corporate research company, GMI). CEO pay is estimated to rise another 36 percent in 2011, according to Forbes magazine, on the high end, and at minimum 10-20 percent, according to corporate consultants, the Hay Group.
Bankers’ Bonuses: Despite the near collapse of many banks, the average pay for the CEOs of the 15 largest banks rose by 36 percent in 2010, according to a study done by the executive compensation research firm, Equilar. Those same 15 banks’ revenues rose by an average of only 2.9 percent. But that didn’t prevent the rapid recovery of bankers’ bonuses. Seven of the 15 banks actually reported a loss, but their CEOs still got bonuses. (The 36 percent is a low-end estimate as it doesn’t include contributions to CEO retirement plans or stock accumulation).
Wealthiest 10 percent Households: The wealthiest 10 percent of households in the U.S. own about 80 percent of all common stock outstanding. Among the top 10 percent, the wealthiest 1 percent own nearly half—38 percent—of that 80 percent. Their share of all the income generated each year in the U.S. has risen from 8 percent in 1980 to 24 percent in 2007. In 2011, it has been estimated the wealthiest 1 percent received 93 percent of all total income gains in the country.
101 Million Workers’ Earnings: The bottom 80 percent of American households had an average income in 2008 of only $31,244 a year. Since 2009 their real weekly earnings, adjusted for inflation, have fallen another 4.5 percent. Other indicators of their declining living standards include: more than 40 million U.S. workers today have no full-time jobs and earn, on average, 70 percent of full-time pay as temp and part-time workers; 47 million Americans live below the official poverty levels; and 45 million are now living on food stamps, including more than 15 million children.
Seven Reasons for Stop/Go Recovery
Why hasn’t the $12 trillion in fiscal and monetary stimulus resulted in a more robust, sustained economic recovery? First, as even many mainstream economists have argued, the Obama recovery programs have been insufficient. The government spending stimulus initiated in early 2009, for example, represented only around $400 billion in spending. The rest of the stimulus was tax cuts, mostly business tax cuts that would prove to have little impact on recovery, given the nature and depth of the current epic contraction. That $400 billion in spending represented less than 3 percent of total output of the gross domestic product (GDP). In contrast to Obama’s weak fiscal response, other economies like China and Germany introduced far more fiscal stimulus when the 2008 downturn hit. China’s stimulus was approximately 17 percent of their GDP and Germany’s was significantly more than the U.S. as well. Both economies fared among the best in terms of recovery in 2009.
Second, spending was not focused on immediate job creation. Most of the $400 billion was provided to state and local governments, schools, the unemployed requiring unemployment insurance, health insurance for the unemployed, more for food stamps (usage had latter doubled), and other similar spending programs. At first Obama declared these subsidies would provide three to four million jobs, then quickly re-framed this to proclaim millions of jobs would be saved by the subsidies. But once subsidies are spent, their economic impact is gone. And that’s exactly what happened in 2010.
While true net job creation results in a continued stream of spending by those employed, Obama never considered direct job creation by the government. His program counted on the private sector to create jobs. However, in one of the greatest failures in U.S. economic policy history, the corporate sector did not create jobs after the year of fiscal-subsidy stimulus. Corporations instead ended up hoarding record levels of cash—more than $2.5 trillion—and not investing it in the U.S. to create jobs. To the extent they invested at all, it was offshore or in financial securities globally, neither of which produced jobs in the U.S.
Obama’s fundamental strategy then was to try to provide a cushion, a floor, to the collapse of consumption—70 percent of the U.S. economy—temporarily for a year. Once the stimulus ran out, the private sector was supposed to kick in. Banks were supposed to lend to small business, too, but didn’t. They also hoarded cash, more than $1 trillion in extra reserves obtained from the Federal Reserve at 0.1 to 0.25 percent interest rates. Big corporations were, according to the Obama strategy, supposed to spend their now-recovered profits in 2010 on jobs. Those getting the jobs would then be able to meet their mortgage payments and avoid a new wave of foreclosures. State and local government revenues would recover with the new business investment and jobs.
The third failure of Obama’s recovery program has been its overemphasis and reliance on tax cuts for business and investors. In turn, corporations, flush with cash, would spend on jobs. But they hoarded most of the tax cuts, or used the cuts to pay down debt, or else diverted it from the U.S. to invest abroad in emerging markets in Asia and elsewhere, or they held it for purposes of anticipated stock buybacks and dividend payouts to their stockholders. By mid-2011 the cash hoard, now more than $2 trillion, led to an explosion of stock buyback and dividend payouts. Obama’s response to this third failure was to provide even more tax cuts to business in late 2010 to entice them to invest and create jobs. Small businesses got tens of billions of tax cuts dollars, faster depreciation write-offs, and workers got a 2 percent payroll tax cut. And then there was the two year extension of the Bush tax cuts in December 2010, which added between $450-$500 billion to the U.S. budget deficit for 2010-2011.
The fourth great failure of Obama’s recovery programs has been the president’s lack of an effective approach to the three great mini-crises in the U.S. economy: immediate job creation, foreclosures and spreading homeowner negative equity, and the chronic fiscal crisis of state and local governments. When the recovery did not occur after the first year, state and local governments were on their own to cut jobs in the hundreds of thousands, cut employee benefits, raise state taxes, and cut untold billions of dollars from services. The states then dumped the pain of spending cuts and fee hikes onto local governments, just as the federal government had turned the problem back to the states. The consequence is widespread local government and teacher layoffs; the slashing of pensions, health benefits, and wages at local government levels; the spreading of cuts in social services; and the desperate introduction of fee hikes by cities and counties.
A fifth failure was Obama’s inability to understand where the economy was going by late summer 2010. Having lost the Congressional elections badly, he resorted to a weaker dose of monetary policy and still more business tax cuts. The economy would relapse once again in a few months. With the entry of the Tea Party to the House of Representatives, future stimulus in 2011 was effectively blocked. This raises the sixth program failure by Obama: his succumbing to the auterity policies of his opponents—i.e., on deficit and debt cutting. Cutting deficits and debt became Obama’s policy centerpiece by late 2011. But no economy ever recovered by means of austerity programs. In fact, such programs all but ensure greater deficits and a more serious economic crises.
A seventh reason is that the Obama bank bailout program failed to eliminate banks’ financial fragility, thus laying the groundwork for sluggish bank lending and a subsequent credit and banking crises. Despite a $9 trillion injection of cash and liquid assets into the banks by the Federal Reserve, and hundreds of billions more by Congress and the U.S. Treasury, a good part of the banking system in the U.S. remains fragile—in particular institutions like Bank of America, Citigroup, and others.
The fundamental failure of the Obama policy with regard to banking was the policy never removed the trillions of bad assets on the banks’ balance sheets. It only offset those bad assets with corresponding $9 trillion in cash injections from the Fed. In theory, such massive offsetting liquidity injections into the banks were supposed to free up bank reserves to small and medium businesses dependent on bank loans. But just as the boosting of large business profits resulted in cash hoarding and no investing or job creation, banks also simply hoarded the historic cash injection and refused to loan to small businesses and consumers. Bank lending actually fell for 15 months during the post-June 2009 recovery period. To summarize, Obama’s recovery strategy failed for seven fundamental reasons:
- Insufficient magnitude or level of fiscal stimulus
- Government spending that was erroneously focused on subsidies instead of jobs
- Over-reliance on business tax cuts that were hoarded instead of invested
- Failure to require bank lending as a condition of the $9+ trillion bank bailouts
- Basic disregard of the three core mini-crises: jobs, housing, local government
- Weak, traditional policy response to the first economic relapse of summer 2010
- Tail-ending opponents’ focus on deficit cutting and austerity solutions
Is a Third Recovery Underway?
Much has been said in recent months about indicators of a sound economic recovery underway. Proponents of the view point to the jobs created the past five months, to rising consumer spending, to the manufacturing sector’s expansion, and to select signs that housing is on the verge of recovery. They point to GDP in the fourth quarter of 2011 rising at a faster 3 percent annual clip. But a closer look at its composition shows the 3 percent was the result mostly of business inventory accumulation which accounted for almost two-thirds of the 3 percent, an unprecedented share; and, second, consumer household spending that was driven largely by credit and household dissaving. The credit-driven component is the consequence of banks showering credit cards once again on consumers and the result of auto sales and lending, as auto companies desperately tried to keep sales momentum going with discounting and attracting financing deals for new car purchases. The rest of retail sales in the quarter were actually below par for a holiday season.
Sustainable consumer spending longer-term depends primarily on increasing household real disposable income. But real disposable income rose in 2010 by only 1.8 percent; in 2011, by an even smaller 1.3 percent. And projections are for even less real income growth in 2012, as yet another round of oil-gasoline driven price hikes in the first half of 2012 hit consumers wallets—the third such since 2008. As consumers are forced to pay more for gas, they will be forced to buy less of other items and thus slow down consumption (70 percent of GDP) in the first half of 2012. In fact, most estimates are that oil prices, a slowing of inventory build-up, and a slowing of manufacturing exports and sales will result in a GDP growth rate of 2 percent or less in the first half of 2012—significantly slower than the fourth quarter of 2011’s 3 percent. The only sector consistently increasing consumption is the wealthiest 10 percent households, whose spending is strongly related to stock market gains which, since last October, have surged again.
The cause of the oil price inflation has little to do with consumer demand, which has been falling for the past several years. It has everything to do with global speculators driving up the price of oil and U.S.-based gasoline refiners taking advantage of the situation, by shutting down refineries to drive the price of gas still higher. Should the Iranian crisis erupt before the November election and crude oil hit $150 per barrel, gas prices—now nearing $4.50 a gallon in many places—will rise above $5 a gallon, which is the breaking point for consumption contracting in general.
Another indicator of imminent recovery favored by its proponents is the jobs market. Much is made of claims that job creation has averaged more than 200,000 each month for the past three months. However, much of these gains represent seasonal and other statistical adjustments to the raw numbers of jobs reported to the labor department over the winter months. Preliminary data for December 2011 through February 2012 show total private non-farm jobs actually declined by 1.7 million. That includes 300,000 construction jobs and 40,000 manufacturing jobs. But it also includes 1.4 million service job declines. While it is likely some job creation has occurred, it will require a shift in seasonality to determine how much of the job creation of recent months is real or just statistical smoothing.
Another area that is over-hyped is the housing-construction sector. With every blip in housing starts or home sales month to month, pundits declare the light is at the end of the housing depression tunnel—only to find the light has gone out in the next month’s data. Housing construction continues at less than 480,000 new units a year—about 1 million less than that of the pre-recession peak. Meanwhile, home prices are again falling in a second double dip, and home sales have again reversed in February. The only source of growth in the market is construction of apartment buildings, not surprising after 12 million foreclosures. Apart from that, construction spending recorded its largest drop in seven months in February that followed a nearly as large decline in January.
Still another area hyped is manufacturing. But manufactured business goods fell in January by 3.7 percent and rose less than half that forecasted in February. But a longer term picture of the past several months indicates manufacturing, while not in decline, has been barely growing since last summer 2011.
Meanwhile, a second major wild card continues to emerge with the chronic financial instability in the Eurozone. With the southern tier countries from Greece to Spain already deep in recession, and bordering on virtual Depression conditions, both the financial instability and the recession conditions are clearly spreading to the rest of Europe. France, Netherlands, and the UK have all entered recession, and Germany is slowing as well. A Eurozone recession is a train that has left the station. How big an impact it has on the U.S. remains to be seen.
Concurrent with the Eurozone’s problems, it now appears China, India and Brazil are all also slowing rapidly, as global manufacturing and trade has been slowing—all had been growing at 8 to10 percent GDP rates. China and India are now in the 6-7 percent range, and Brazil is at less than 2 percent. The debate now is whether the landing will be hard or soft. With Europe, Asia and much of the rest of the global economy slowing, it is impossible for the U.S. to avoid a further slowing as well. The only question is when and how fast will global economic developments negatively impact the U.S. There is no way the U.S. economy can continue to recover as Europe and the rest of the world continue to slow. (This is especially true if, as this writer predicts, yet another debt-banking crisis re-emerges in the Eurozone before year-end 2012.)
It should be noted that while this scenario is contrary to the general forecast of most mainstream economists today, it is not an isolated view. One need only read between the lines in the statements by Federal Reserve chair Ben Bernanke to see even official U.S. government views on the still very weak and uncertain U.S. recovery are not all that sanguine that the recovery can be sustained. Another source, the highly respected Economic Cycle Research Institute (ECRI), insists that a double dip recession in the U.S. is on track and inevitable. ECRI has the distinction of having predicted nearly all the recessions in the past several decades in the U.S., including the 2007 advent of the current recession. Other notable forecasters with excellent prediction track records, such as New York University professor Nouriel Roubini, financier George Soros, and others hold a view similar to this writer’s.
Regardless of who is elected, the ruling elite of both political parties will turn to additional massive deficit cutting immediately after November. Those new cuts in the trillions of dollars will be added to the already passed $2.2 trillion, which will start taking effect in January 2013. Combined with a Eurozone that can only get worse with time, and a rush toward a hard landing in the economies of China, Brazil, and others, plus the need to recycle record amounts of corporate junk bond debt in 2013—a double dip recession is likely in 2013.
Jack Rasmus is the author of Obama’s Economy: Recovery for the Few, published by Pluto Press and Palgrave-Macmillan, April 2012. His website is www.kyklosproductions.com and his blog is jackrasmus.com.