The Avoidable Depression: No-One Believes

the U.S. is the Land of Opportunity Anymore

by Mike Whitney

The economy has gone from bad to worse. Last Friday's report from the Commerce Department confirmed that GDP had slipped from 3.7% to 2.4% in one quarter. Now that depleted stockpiles have been rebuilt and fiscal stimulus is running out, activity will continue to sputter increasing the likelihood of a double dip recession.

 

Consumer credit and spending continue to decline and data released on Tuesday show that a sharp increase in personal savings rate which climbed to 6.4%.

 

Mushrooming savings indicate that household deleveraging is ongoing which will reduce spending and further exacerbate the second-half slowdown.

 

The jobs situation is equally grim; 8 million jobs have been lost since the beginning of the recession, but policymakers on Capital Hill and at the Fed refuse to initiate government programs or provide funding that will put the country back to work.

 

The stock market has continued its highwire act, mainly due to corporate earnings reports that surprised to the upside. 75% of S&P companies beat analysts estimates which helped send shares higher on low volume. Corporate profits increased but revenues fell, meaning that companies have laid off workers and trimmed expenses to fatten the bottom line. In other words, profitability has been maintained even though the overall size of the pie has shrunk. Stocks rallied on what is essentially bad news.

This is from ABC News:

 

"Consumer confidence matched its low for the year this week, with the ABC News Consumer Comfort Index extending a steep 9-point, six-week drop from what had been its 2010 high....The weekly index, based on Americans’ views of the national economy, the buying climate and their personal finances, stands at -50 on its scale of +100 to -100, just 4 points from its lowest on record in nearly 25 years of weekly polls...It's in effect the death zone for consumer sentiment."

Consumer confidence is plunging because of persistent high unemployment, flatlining personal incomes, and falling home prices. Ordinary working people do not care about the budget deficits; that's a myth propagated by the right wing think tanks. They care about jobs, wages, and providing for their families. Congress's unwillingness to address the problems that face the middle class has progressively eroded their confidence in government. Pessimism abounds.

 

This is from the Wall Street Journal:

"The lackluster job market continued to weigh on confidence. The share of consumers who expected the job market to improve in the next six months fell to 14.3% in July, the second-straight monthly drop and the lowest reading since March...Views of business conditions also worsened. The share of people who expected conditions to improve over the next half-year fell to 15.9% in July, the lowest since April 2009." ("Home prices rise but outlook for sector dims", Conor Dougherty, Wall Street Journal)

No one believes that the U..S is the land of opportunity anymore or that their children will have a better life than their own. As the slump deepens, pessimism will turn to desperation, higher crime and social unrest. Everyone pays for long-term unemployment.

Factory orders, household purchases and personal consumption expenditures (PCE) are all in the dumps. New mortgage applications and home sales have plummeted to historic lows. Housing prices are expected to follow the downward trend in sales. Still, the stock market lunges upward in fits-and-starts utterly disconnected from the underlying "real" economy where personal balance sheets are in ruins and there are 6 applicants for every 1 available job. Things have never been worse.

This is from Naked Capitalism:

"A Wells Fargo/Gallup survey of 604 small business owners conducted in early July showed a plunge in already negative readings to new lows. This gloomy outlook matters because small businesses were the biggest source in job creation in the last upturn and are expected again to be the main source of hiring.

Even worse, small business owners expect things to get worse. The main reason for the decline in the index was the decay in the Future Expectations subindex, which is the first time business owners as a whole have been negative about their companies’ prospects for the upcoming year.

42% of respondents anticipate it will be “somewhat” or “very difficult” to borrow, and 22% forecast their financial condition a year out as “somewhat” or “very bad.” ("Small Business Sentiment Hits New Low", Naked Capitalism, Yves Smith)

Washington has sold out small business to the big banks and multinationals. America's jobs-generating engine has collapsed. Expect more outsourcing, more offshoring, more tax-dodging, and more middle class bloodletting for the foreseeable future. The New World Order continues apace.

Unlike the stock market, the bond market accurately reflects the real condition of the economy. 2-year Treasuries are at historic lows, while the 10-year has dipped below 3%. The flight-to-safety is pushing bond yields down even while equities continue to surge. Deflationary pressures are building, the so-called recovery is stalling. Bondholders are not taken-in by the cheery news of green shoots. They know how to read the data--spending is down, credit is tight, unemployment is headed higher, the banks are hiding their red ink, Europe's in trouble, manufacturing is about to slide, housing is in freefall, the money supply is shrinking, and the Fed is sitting on its hands doing absolutely nothing. When industry-leader Proctor & Gamble missed analysts earnings projections on Tuesday, it became apparent that product prices would continue to be slashed in an effort to retain market share. When prices fall, layoffs ensue and the downward spiral begins. Even so, Fed chairman Ben Bernanke continues to take a wait-and-see attitude.

The next leg down will be falling wages and collapsing asset prices. That will add to unemployment while putting more pressure on bank balance sheets leading to another round of bank closures. The Fed will be forced to restart quantitative easing--the central bank's bond-purchasing program designed to pump liquidity into the economy when interest rates are stuck at zero.

 

Here's an excerpt from the New York Times:

"Pay cuts are appearing most frequently among state and local governments, which are under extraordinary budget pressures and have often already tried furloughs, i.e., docking pay in exchange for time off.....Some businesses are also cutting workers’ pay, often to help stay afloat or to eliminate their losses, although a few have seized on the slack labor market and workers’ weak bargaining power to cut pay and thereby increase their profits and competitiveness….

Factory owners sometimes warn that they will close or move jobs to lower-cost locales unless workers agree to a pay cut. In its most recent union contract, General Motors is paying new employees $14 an hour, half the rate it pays its long-term workers.

Sub-Zero, which makes refrigerators, freezers and ovens, warned its workers last month that it might close one or more factories in Wisconsin and lay off 500 employees unless they accepted a 20 percent cut in wages and benefits…

David Lewin, a professor of management at the University of California, Los Angeles, who has written extensively on employee compensation, says some cuts are also quietly taking place among nonunion employers." ("More Workers Face Pay Cuts, Not Furloughs", Steven Greenhouse, New York Times)

The economy is slipping fast into deflation, but it's not too late to act. The bond market is telling us that the economy needs more fiscal stimulus. The labor market is telling us that the economy needs more fiscal stimulus. The housing market s telling us that the economy needs more fiscal stimulus. Manufacturing, consumer spending, consumer credit and bank lending are all telling us that the economy needs more fiscal stimulus. Every sector and datapoint is telling us the economy needs more fiscal stimulus. But congress, the White House, and the myriad far-right think tanks and foundations are telling us that they want debt consolidation, austerity measures, structural adjustment and belt-tightening. "That is what the market demands", they opine. Here is a response from economist J.

 

Bradford DeLong from his blog "Grasping Reality With Both Hands":

"What else does history tell us? It tells us that in 1925 Chancellor of the Exchequer Winston Churchill was ill-served when he rejected the arguments of John Maynard Keynes and accepted the arguments of his Treasury staff that Britain required retrenchment and austerity: Churchill thus gave Britain a three-year head start on suffering from the Great Depression.

It tells us that from 1930-1936 the belief of government after government of France’s Third Republic that if only they retrenched a little longer that the confidence of world capital markets in France would be so great that it could escape the Great Depression unscathed: the length of the Great Depression and the class war thus engendered in France weakened it enormously in the late 1930s.....” It teaches us that Weimar German SPD leader Rudolf Hilferding was extremely ill-advised to commit the SPD to policies of retrenchment and austerity when his labour economist Wladimir Woytinsky was calling for the SPD to develop a plan for a New Deal for Germany. And it teaches us that in his memoirs U.S. President Herbert Hoover, who was bitter about many things, was bitterest that he had let Treasury Secretary Andrew Mellon hamstring Hoover’s progressive impulses and lead the Hoover administration to policies of retrenchment and austerity.

History teaches us that when none of the three clear and present dangers that justify retrenchment and austerity--interest-rate crowding-out, rising inflationary pressures on consumer prices, national overleverage via borrowing in foreign currencies--are present, you should not retrench and austerity: don’t call the fire truck when there is no smoke. And history teaches us that when economies suffer from high unemployment, enormous excess capacity, incipient deflation, businesses terrified of a lack of customers, and an enormous excess demand for high quality assets, then is the time for expansion and stimulus: when the deck is awash, start bailing." ("Jean-Claude trichet rejects the counsels of history", J.Bradford DeLong, "Grasping Reality With Both Hands")

Depression is avoidable. Unfortunately, policymakers are dead-set on dragging the economy into another Depression. And that's the tragedy.