Where Do You Think the Economy Will Be a Year From Now?

Dating back to late 2007, we’ve had a deep recession and a miserable recovery. After this multi-year mess, where will the economy be a year from now?

A Rasmussen Reports survey of adults released on June 18 found that 36 percent thought that the economy would be stronger a year from now. However, 38 percent thought it would be worse, and 14 percent thought it would be about the same. Another 13 percent were unsure.

That’s 52 percent of adults expecting no improvement or a worsening in the economy a year from now. That’s troublesome, but not surprising.

People obviously are having a tough time shaking off the tough times of the past four-and-a-half-plus years. At the same time, though, there is little reason, right now, for a shift in their expectations.

There are troubles in Europe, China and the Middle East, for example. But more importantly, there has been no recognition on behalf of President Obama and the majority in the U.S. Senate that the U.S. desperately needs a dramatic shift in a new direction on policy.

On the policy front, all the wrong moves have been made since the recession began, including huge increases in government spending and debt; government bailouts of troubled businesses; tax increases and threatened tax increases; more regulation; absolutely no leadership on global trade policy; and monetary policy that has lost focus on price stability in favor of fruitless efforts to juice up the economy through expansive monetary policy. Meanwhile, any positives were barely detectable, such as very targeted, temporary tax measures.

If this is what continues, there is little reason to expect a robust economy a year from now, or five years from now. However, if this policy mess is moved in the exact opposite direction – such as permanent, pro-growth tax and regulatory relief; smaller government; leading the way on free trade; and monetary policy focused on price stability – then we will see real improvement in the U.S. economy.

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Raymond J. Keating is chief economist for the Small Business and Entrepreneurship Council, and author of "Chuck" vs. the Business World: Business Tips on TV.

SBE Council Chief Economist on Latest Jobs Data

Today, Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council (SBE Council), released the following statement in response to the May employment data reported by the U.S. Bureau of Labor Statistics:

"The latest data from the Bureau of Labor Statistics continues to tell a mixed story on jobs and the U.S. economy.

"The establishment survey pointed to an increase of only 69,000 in employment for the month of May, far below expectations and where job creation should be - at 240,000 to 250,000 - during a recovery.

"However, at the same time, the household survey showed an increase of 422,000 in employment, as well as an increase of 642,000 in the labor force. Those increases came after two-month declines in both. Household survey data is volatile form month to month. One hopes that the May performance will become a trend, but it's hard to envision such a turn, unfortunately, given the policy realities at hand right now.

"The story of uneven, under-performing job creation is not surprising. It's exactly what we should expect given a policy environment emphasizing higher taxes, increased regulation, excessive government spending crowding out the private sector, and a lack of leadership on trade. The U.S. economy desperately needs a change in public policy to ignite entrepreneurship and investment, and the economic growth and job creation that result. If that does not happen, we all better get used to slow growth and poor job creation."

On Those First Quarter GDP Numbers

It’s hard to be an entrepreneur and at the same time be a pessimist. Entrepreneurship really requires optimism. Of course, that optimism must be rooted in reality.

 

It’s been tough, therefore, to be an entrepreneur in recent years, not to mention an economist for a small business group. After all, you long to be optimist on the economy, but policymaking has made robust optimism simply not realistic.

 

We were reminded of this unfortunate fact when the U.S. Bureau of Economic Analysis released its initial estimates on first quarter GDP last week. After one of the worst recessions in the post-World War II era ended in mid-2009, the subsequent recovery has been grossly under-performing.

 

During periods of economic recovery/growth, based on data over the past six-plus decades, we should be experiencing real growth averaging at least in the 4.0 percent to 4.5 percent range.

 

Real GDP growth in the first quarter came in at a mere 2.2 percent. And during this recovery, growth has averaged only 2.4 percent, without growth in even one quarter touching 4 percent.

 

Quite simply, it continues to be one of the worst economic recoveries on record.

 

But, again, given the egregiously anti-growth tax, regulatory and spending policies; largely nonexistent U.S. trade policy; and misguided monetary policy that have dominated for more than four years now, no one should be surprised by this dismal economic record.

 

Particularly troubling in the first quarter GDP data was the fact that private nonresidential investment was so poor, with investment in structures falling by 12 percent, and software and equipment only inching forward by 1.7 percent. That’s troublesome now and for the future.

 

Looking ahead, if such policymaking persists, no one should be surprised if the U.S. meanders along in a Europe-like sluggishness.

 

Of course, things do not have to be that way. Our nation can return to economic greatness and leadership if we choose to unleash the creative power of entrepreneurs, investors and businesses by getting government out of the way, that is, by permanently and deeply reducing tax rates, deregulating, reining in the size of government, advancing free trade, and refocusing monetary policy on price stability.

 

That would be cause for entrepreneurial optimism rooted in policy reality.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is “Chuck” vs. the Business World: Business Tips on TV.  

SBE Council Chief Economist First Quarter GDP Growth

Today, Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council (SBE Council), issued the following statement about the first quarter GDP numbers released by the U.S. Bureau of Economic Analysis:

 

“During periods of economic recovery/growth, based on data over the past six-plus decades, we should be experiencing real growth averaging at least in the 4.0 percent to 4.5 percent range. However, real GDP growth in the first quarter came in at a mere 2.2 percent. And during this recovery, growth has averaged only 2.4 percent, failing to reach 4 percent in even one quarter.

 

“Quite simply, one of the worst economic recoveries on record continued to grossly under-perform in the first quarter. Some people actually seem surprised by this. Why? After all, given egregiously anti-growth tax, regulatory and spending policies; largely nonexistent U.S. trade policy; and misguided monetary policy that have dominated for more than four years now, no one should be surprised by this dismal economic record. Indeed, if such policymaking persists, no one should be surprised if the U.S. meanders along in a Europe-like sluggishness for the foreseeable future.”

"Modest to Moderate" Growth Not Good Enough

After four-plus years of a deep recession and poor recovery, some can get excited when the economy merely muddles along at a below-average rate of growth.

That seems to be the case with some in their reaction to the release of the Federal Reserve’s Beige Book on April 11. The information gathered from the Fed’s 12 regional banks pointed to the economy from mid-February through late March continuing to grow “at a modest to moderate pace.”

During periods of recovery, real GDP growth should be expanding robustly. Based on post-World War II history, real GDP should be growing in the 4.5% range. Overall, including recessions, the economy should be growing at better than 3%. Unfortunately, since the recovery began in mid-2009, real GDP growth has averaged a mere 2.5%.

From 2008 to 2011, real annual GDP grew by only 1.2%.

The same pretty much goes for job creation. It was reported in the Fed Beige Book: “Hiring was steady or showed a modest increase across many Districts.”

Again, the job creation numbers have been inconsistent and underwhelming during this recovery. As of March, according to the household survey, employment was still 4.6 million below its peak in November 2007. That just over four years and four months!

The problem with our economy has been and continues to be policy.

On the fiscal side, it’s about federal spending careening out of control, and tax increases, scheduled tax increases and the threat of even more taxes. It’s about hyper-regulation, including on the finance, health care and energy fronts.

But it does not stop there. It’s also about misguided monetary policy in place since the late summer 2008. The Fed has been focused on trying to use monetary policy to gin up the economy, which never works. Instead, it creates uncertainty and concerns over higher inflation. The value of the dollar suffers accordingly, and energy prices, particularly the price of oil and therefore gasoline costs, rise as well.

For good measure, with interest rates purposefully pushed so low by the Fed, banks actually have real concerns about lending money since rates inevitably are going to rise, especially when inflation accelerates. Banks would then be in the position of having long term loans at extremely low rates, and having to pay higher interest rates to pull in capital. That doesn’t work.

Modest to moderate economic growth simply does not cut it. The American people need far better. Indeed, they cannot afford to settle for less than what we should be experiencing, that is, robust growth with solid job creation. But that will require a shift in policy to lower taxes, smaller government, deregulation, and monetary policy exclusively focused on price stability. Indeed, if we do not get a dramatic policy change, it’s doubtful that “modest to moderate” will even be sustained.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is “Chuck” vs. the Business World: Business Tips on TV.

SBE Council Chief Economist on Initial Jobless Claims

Today, Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council (SBE Council), released the following statement in response to the latest initial jobless claims released by the Department of Labor:

"The second week in a row of seasonally adjusted initial jobless claims coming in at 351,000 is a clear plus. That's the lowest level since early March 2008. And the trend, though uneven, has been positive since mid-September of last year.

"While moving below the 400,000 initial claims level is important, it must be pointed out that during periods of solid economic growth, initial jobless claims generally run in the range of 270,000 to 330,000. So, we still have plenty of work to do.

"Our economic recovery remains uncertain, uneven and under-performing largely due to an adverse policy climate for business and investment. To return to robust economic and employment growth, there needs to be a shift from anti-growth tax, regulatory and government spending policies to a pro-growth policy structure of tax and regulatory relief, and smaller government."

FOMC's Economic Outlook: Far From Robust

In its statement released on January 25, the Federal Open Market Committee (FOMC) did not change its position on monetary policy.

Basically, the Fed's assessment is that the economy is growing moderately, with household spending up but business fixed investment slowing and housing still depressed. As for inflation, the Fed remains unconcerned. Looking ahead a bit on jobs, the Fed is looking for the unemployment rate to decline slowly.

But what was notable is the Fed's apparent expectation that a slow recovery will continue for the coming three years. Yes, that's three years.

Specifically, the FOMC statement declared: "[T]he Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014."

In Fed-speak, "accommodative" means the Fed is unconcerned about inflation, but worried that economic and employment growth will be lacking.

Looking at the new accompanying economic projections by FOMC members, the central tendency points to a range of real GDP growth for 2012 at 2.2%-2.7%, for 2013 at 2.8%-3.2%, for 2014 at 3.3%-4.0%, and the long range is put at 2.3%-2.6%.

Given that real annual growth since 1950 has averaged about 4.5 percent during recovery/expansion years, the Fed is working under the assumption that an under-performing economic recovery is going to persist for at least three more years. Indeed, real GDP growth, according to Fed expectations, is expected to run lower than the average 3.4 percent rate over the past six-plus decades including recession quarters.

Of course, monetary policy ultimately should be about price stability, and FOMC members naturally are projecting tame inflation. Why would we expect otherwise?

In the end, growth is about private sector investment, innovation, entrepreneurship and productivity. These certainly are affected by monetary policy and inflation - for example, in terms of interest rates, the value of the dollar and the ability to plan - but federal tax and regulatory policies are the measures that have significant and direct impact on incentives and therefore the economy. That's the job of the President and Congress, and according to Fed estimates, we need a dramatic shift in a pro-growth direction on taxes and regulations.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

SBE Council Economist Thumbs Up on Letter to Bernanke

Considerable media attention has been drawn today to an "Open Letter" to Fed Chairman Ben Bernanke by various economists and other experts opposing the Fed's quantitative easing announced earlier this month.

SBE Council chief economist Raymond J. Keating noted: "This letter is right on the mark in pointing out that the Fed's planned asset purchases will do nothing in terms of boosting employment, while clearly further raising the risks of debasing the dollar and hiking inflation. It's also correct to note that changes in tax, spending and regulatory policies are needed to help get the economy moving.

"That does not mean more government spending. Nor does it mean targeted and temporary tax measures. As many of us predicted, such measures, combined with loose money, over the past three years have accomplished nothing in terms of enhancing economic growth.

"What the U.S. economy needs to boost entrepreneurship, investment, growth and job creation are government spending cuts in order to get resources out of political hands and into the private sector; substantive and permanent tax and regulatory relief to boost pro-growth incentives; free trade agreements to expand opportunity; and monetary policy refocused on price stability in order to limit future inflation woes."

SBE Council Chief Economist on Latest GDP Numbers

Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council (SBE Council), issued the following statement on the latest GDP numbers:

"The latest GDP numbers continue to tell a rather grim economic story. Real GDP growth of 2.4% in the second quarter showed not only an under-performing economy, but one in which GDP growth is slowing over the past three quarters. Most worrisome, after factoring out the government sector, real private GDP grew by a pathetic 1.5%.

"However, the few positives came in real private investment and on the trade front, which provides some hope for further economic improvement looking ahead. Unfortunately, private investment and entrepreneurship have to battle against a public policy agenda that works specifically against risk taking, growth and job creation.

"It must be pointed out that 2007 to 2009 marked the worst three-year performance by the U.S. economy since the steep recession as the nation emerged from the Second World War. In fact, over the past decade, real annual U.S. economic growth averaged a mere 1.8% compared to a post-WWII average of 3.3%. Unfortunately, under Obama-nomics, which features huge increases in government spending, taxes and regulation, no reason exists to expect the U.S. economy to get back on a high-growth track. If the nation's policy agenda is not turned around in a more pro-growth, smaller-government direction, we should expect little different over the coming decade than what we experienced over the last decade. Indeed, it should be worse."

GDP Numbers Updated

The U.S. Bureau of Economic Analysis came out with its second estimate of second quarter GDP today.

The top line number was unchanged, with real GDP growth in the second quarter registering -1.0%.

However, it needs to be recognized that government investment and consumption played a big part in making the GDP number look better than it otherwise was. Federal government spending was up 11%, and state and local government by 3.6%.

So, real private sector GDP growth – that is, quality GDP growth – actually came in at a grim -2.27%.

The theory on more government spending in recession is that it will somehow spark the private sector. The reality? Government merely crowds out the private sector.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council