In June of 2009 I wrote about how inaccurate the V crowd was; that our downturn was not a momentary interruption of our generation spanning expansion but reflected a structural shift in our economy and society as a whole. https://fattails.typepad.com/deviations_from_the_mean/2009/06/fasten-your-seat-belts-its-going-to-be-slow.html With attribution to Thomas Doerflinger at UBS I believe we have entered a period which could be coined The Great Suppression. And the Great Suppression, on many levels, will continue despite the elation in the financial markets last week following the election and the Fed's implementation of QE2. This does not imply that our economy will be mired in recession for the foreseeable future, far from it, but that our expansion will continue in a muted fashion and growth will be well below the pace of the last decade. Additionally, given higher taxes, economic volatility, and political volatility; the years ahead will not feel particularly prosperous for most people as real - not nominal - gains in income will be modest and our living standards are not likely to improve.
In June of 2009, the time of the earlier post, Non Farm Payrolls stood at 130.6 million, the September 2010 report put that figure at 130.2 million. Average hours worked increased from 33 to 33.5 hours during this period but U-3, the headline measure of unemployment, also increased from 9.5 to 9.6%. U-6, a more comprehensive estimate of unemployment and underemployment is in the teens and we are exceeding every prior recorded measure of duration of unemployment. Additionally the latest GDP data indicate, on a nominal basis, that we are growing in the sub 2% range. Calculations of Real GDP are likely obfuscated by certain structural shifts underway. On an encouraging note recent ISM surveys have been positive and, for the past 40 years, these data series have been strongly correlated to GDP growth.
The very necessary deleveraging following our recent prosperity is a component of our present malaise. Debt as a % of GDP has climbed to levels not seen since the Second World War and here I enclose an appropriately frightening chart that demonstrates this quite well. Additionally, the recapitalization of the banks and changes to our financial system, housing
sector, and real economy will take time to correct past imbalances. A great party is often followed by a blistering hangover. The profound changes to our economy and the very real disruption in millions of lives cannot be changed over the course of a few quarters as the V shaped recovery crowd was so loudly advocating in 2009.
So where does this leave us now? For many secular reasons past, and recent policy moves present, we are still in for a long slog. The applicable factors are not merely confined to the sphere of economics; they also pertain to changes in our polity some of which are discussed below. These policies, however well intentioned, are - in the aggregate - exerting a dampening effect on our economy now and for the foreseeable future.
Federal Spending, High Budget Deficits, and government interventions
From FY2007 to FY2011E, Federal Outlays grew 40%. Federal spending as a percentage of GDP is now 25% versus a 1950 - 2007 average of 20%.1 While much of this spending was arguably necessary to avert an even worse recession, resources devoted to the pubic sector are crowding out resources that would normally flow to the private sector. We will be debating for decades if our last round of Keynesian stimulus worked or if the multiplier still exists, but observation throughout history has repeatedly shown that capital is more productive in private hands. It's a guns vs butter thing.
The increase of government spending, our unfunded entitlements, and increased debt service cost on Federal debt will lead to higher taxes and fewer services down the road, and further decrease the money available for private investment. For the United States this is a very bad thing. If we are to compete with the emerging markets in real industries, as opposed to flexing our traditional comparative advantage in financial engineering and weapons control systems, we have to have a viable infrastructure and education system. One trip to Kennedy airport belies any impression that our roads and runways are in good shape and the management of our schools is a source of constant discord.
The increase of government involvement in our industries has to decrease and businesses need clearer ideas of what the rules are going to be. At the time of this writing, the Bush tax cuts are still much debated and regardless of your political views on the matter most of us can well agree that just knowing what tax rates are going to be next year would be a good thing for all of us.
The recent healthcare bill mandated that, starting in 2012, companies paying for any services provided by a corporation in excess of $600 file a 1099. In the past this was only done for contract workers. Knowing how our congress works it is a reasonable bet that, like the alternative minimum tax, should this provision remain law it will likely not be indexed for inflation. Only a congressman could think that such a proliferation of paperwork would not inhibit business activity. Moreover, in a further bow to the law of unintended consequences: under the coming healthcare reform companies with under 50 employees will not have to provide coverage in effect encouraging small companies to stay small or outsource.
While things may well look better now than they did a few months ago keep in mind we are still very much in for a long slog. The Great Suppression continues.
1. UBS, Bloomberg Estimates.