SBE Council Chief Economist Comments on Second Quarter GDP Growth

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

“Real GDP growth of 1.5% in the second quarter, following on 2% in the first quarter, is simply abysmal.  In fact, this entire recovery has been one of the worst on record. Real GDP growth over the past three years has averaged 2.2 percent, when we should be growing at double that rate during a recovery.

“One of the great dangers of continually poor GDP numbers for four-and-a-half years now is falling into the trap of diminished expectations. Make no mistake, the U.S. should not accept poor economic growth as some kind of new normal. Instead, serious pro-growth policy changes, such as tax and regulatory relief and stability, reining in government spending, and leading on trade, would put the U.S. back on a path of robust entrepreneurship, investment, growth and job creation.”

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."

Latest Credit Data Shows Life

Contrary to how many people might feel, we have not actually been in a recession since December 2007.

The recession that began at the end of 2007 was one of the deepest and longest on record. But it officially ended in mid-2009. The subsequent recovery, though, has been so poor that it feels like the recession never ended.

The reality of a long-term under-performing economy has meant that banks have been less willing to lend (coupled with increased regulation), at the same time that loan demand has declined and been restrained among both businesses and consumers.

Two indicators reflecting this economic and credit reality are nonrevolving credit and revolving credit.

When the mortgage/credit mess hit in the summer of 2008, consumer credit outstanding dropped dramatically. For nonrevolving credit, that decline lasted to May 2010.

But revolving credit (overwhelmingly credit cards) kept falling through August of 2011.

However, the latest data released by the Federal Reserve on February 7 noted that both nonrevolving and revolving credit increased notably in both November and December.

Nonrevolving credit grew by a seasonally adjusted, annual rate of 10.7 percent in November and 11.8 percent in December.

Revolving credit was up by 8.4 percent in November and by 4.1 percent in December.

Along with the latest employment data, these numbers provide some hope that this anemic recovery might be gaining a bit more strength.

Of course, when things have been so bad for so long, it's easy to get a bit carried away. Keep in mind that since July 2008, nonrevolving credit is only up by 5 percent, and revolving credit is still down by 18 percent over the same period.

The hope that can be found in these latest consumer credit numbers, of course, would only grow and strengthen if policymakers stepped back from excessive taxation and regulation, and if it reined in the subsidies and political games that swirl around so much of the credit market, in particular home mortgages.

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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.

Keating on State of the Union for Fox Business

SBE Council chief economist Ray Keating was quoted by Fox Business News on what President Obama had to say about small business in his State of the Union address.

Keating was quoted: "He was clear on things small business owners didn't want him to be clear on. (For example) taxes on high income earners—that means fewer resources in the hands of entrepreneurs and investors, and more dollars in the hands of politicians. It's difficult to see how that is positive for small businesses."

Get more from Keating and read the entire article here.

SBE Council Chief Economist on Latest Jobs Numbers and the Economy

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

"What most people miss each month is that the jobs report is a story of two surveys - the payroll survey, which captures employment at established, larger firms, and the household survey, which is more volatile but better reflects small business and start up activity.

"The payroll survey for October offers nothing exciting. Employment growth of 80,000 was pathetic, and even if focusing on the private sector, a 104,000 gain was under-performing.

"The household survey, however, offers hope. After two years of downward movement and bouncing along the bottom, the labor force has gained for three months now: +366,000 in August, +423,000 in September, and +181,000 in October. At the same time, and most important, jobs growth in the household survey has been strong and positive for three straight months now: +331,000 in August, +398,000 in September, and +277,000 in October. Of course, both the labor force participation rate and the employment-population ratio linger near quarter-century lows. But the question is: Are we at some kind of turning point?

"The answer to that, though, remains murky. Uncertainty on the economy and jobs, unfortunately, persists overwhelmingly due to an anti-growth policy environment. If tax, regulatory, and trade policies shifted in a pro-growth direction; government spending and debt were reined in; and monetary policy got re-focused on price stability, then the resulting confidence and clarity would be a huge plus for entrepreneurship, investment, and economic and employment growth."

Obama's Plan for the Economy and Deficit

President Barack Obama has been talking a lot about reigniting economic growth and reining in the federal budget deficit. Unfortunately, he has not been saying much that's substantive or helpful on these matters.

Consider his "Plan for Economic Growth and Deficit Reduction." It is claimed in the plan: "Overall, it pays for the President's jobs bill and produces net savings of more than $3 trillion over the next decade, on top of the roughly $1 trillion in spending cuts that the President already signed into law in the Budget Control Act - for a total savings of more than $4 trillion over the next decade."

At first, this might sound impressive. But then the details come into focus...

Read the rest of this SBE Council Cybercolumn by chief economist Ray Keating here.

SBE Council Chief Economist on August Jobs Numbers and President's Speech

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

"The August jobs numbers simply continued the long, frustrating story of a grossly under-performing economic recovery, and generally clueless policymaking.

"The payroll survey pointed to a mere gain of 17,000 in private payrolls in August, with the trend showing a dramatic slowdown in hiring over the past four months. Meanwhile, the household survey, which better captures start up and small business activity, reported the labor force up by 366,000 and employment up 331,000 in August. But that good news must be tempered by the reality that employment is still down by 237,000 from its 2011 high in March, and the labor force is down by 99,000 compared to where it was in May. The August household survey increases are more likely blips rather than the start of positive trends, unfortunately.

"As for President Obama's jobs speech on September 8, it appears it may include more of the same policymaking that has failed for the past nearly three years. For example, politically-driven infrastructure spending, subsidies for his favored 'green' jobs, temporary and targeted tax measures, and further extensions of unemployment benefits will not create jobs or restore business confidence. Our economy needs substantive and permanent tax relief, deregulation, smaller government, and aggressive free trade policies. That, unfortunately, is the antithesis of Obama-nomics."

The S&P Downgrade and the Future of our Economy

S&P downgraded the U.S. federal government’s credit rating to one notch down from its long held AAA status on Friday last week.

One result has been big volatility in the financial markets. For example, the Dow Jones Industrials plummeted by 635 points on Monday, August 8, with the market then climbing back by 430 points the following day.

But what does the downgrade say about what entrepreneurs, small businesses and their employees have to deal with in terms of the economy?

The bottom line is that the high level of uncertainty that businesses and investors have been wrestling with for nearly four years now promises to continue. Just on the downgrade issue itself, who should be believed – S&P that downgraded, or Moody’s and Fitch who did not?

S&P’s downgrade was sparked by the rating agency looking for a debt deal that would have imposed $4-trillion restraint on the projected increase in federal borrowing over the coming decade. The eventual debt ceiling agreement came in a bit over $2 trillion.

But what does that even mean? After all, beyond the current Congress, long-term budget deals do not really mean much unless they include some kind of institutional or constitutional caps on spending. Such caps were not included in this agreement...

Read the rest of this SBE Council Cybercolumn by chief economist Ray Keating here.

FOMC Down on Economy

In its policy statement released on August 9, the Federal Open Market Committee (FOMC) turned more pessimistic on the state of the economy. Apparently, Ben Bernanke and the rest of the Fed’s monetary policymakers have caught up to what many of us have been saying, at least when it comes to economic growth, or the lack thereof.

For example, the FOMC said, “Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand.”

And later: “The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased.”

The FOMC reiterated its lack of concern on inflation and inflation expectations, and pledged to maintain its loose monetary policy. The FOMC said it would “keep the target range for the federal funds rate at 0 to 1/4 percent,” and maintain “low levels for the federal funds rate at least through mid-2013.”

In effect, the FOMC now sees what small business owners and job seekers have understood for some time now, i.e., that this is a terrible recovery and little reasons exists to expect a shift into a robust, sustained period of economic growth.

At the same time, with its unprecedented monetary expansion over the past nearly three years, the Fed has accomplished nothing in terms of ginning up economic and employment growth. To the contrary, economic volatility and uncertainty has been magnified due to Fed policy de-coupled from maintaining price stability. Bernanke and Company have not caught up to this policy reality, unfortunately.

And as history has shown, contrary to the Fed’s prevailing assumptions, higher inflation and slow economic growth – i.e., stagflation – can coexist, and that has been the case over much of the past year or so.

The right policy mix this economy needs is monetary policy focused on price stability, and fiscal policy focused on growth – not through bigger government, but by removing barriers to private sector growth by stabilizing and reducing tax rates, regulatory relief and opening up global markets to trade. That is, the exact opposite of the policy agenda being following for over three-and-a-half years now.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council

Economic Juveniles

Economist Richard Rahn had an excellent column in the August 16 Washington Times titled "Juveniles in Charge." It provides excellent lessons in property rights, and misguided economic policymaking.

The entire piece is worth reading, with the following worth highlighting here:

"The bad news is that the economy is not growing or creating jobs as the juveniles who control Washington predicted. Most clear-thinking adults, even without formal training in economics, can understand that if the government greatly increases regulations on business (not justified by serious cost-benefit analysis) and increases taxes on labor and capital, the cost of doing business will rise; hence, businesses will have to hire fewer workers. Obviously, these basic concepts have eluded a majority of the members of Congress and many in the administration because this is precisely what they have been doing."

The entire column can be read here.

SBE Council Chief Economist on FOMC Statement and Economic Policy

Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council (SBE Council), issued the following remarks on yesterday's statement on monetary policy from the Federal Open Market Committee:

"Many in the financial markets and business community waited anxiously for what the FOMC would say today. But in terms of actual policy implications, it matters not at all. All we heard different was that the Fed downgraded its view on the pace of recovery. But if you pay attention to the poor state of small business, and dismal trends in the labor force and employment, you already knew that robust economic growth is nowhere to be found.

"Monetary policy has had no impact on reviving the economy for nearly two years, and no one should expect it to have a positive effect in the future. The economy's problems come overwhelmingly from the fiscal side of the equation. That is, misguided government spending, tax, regulatory and trade policies are raising costs, limiting opportunities, and generating uncertainty and fear for entrepreneurs, businesses and investors. There's nothing the Fed can do about that. It's up to the White House and Congress."

SBE Council Chief Economist on State Employment Data

Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council (SBE Council), issued the following statement on today's June jobs data for the states:

"The Bureau of Labor Statistics reports that state unemployment rates were generally lower in June. But the employment story actually remains quite grim. The key reason for lower unemployment rates was the decline in states' labor forces. That is, people dropping out of the labor market. In fact, in June, 48 states and the District of Columbia experienced declines in seasonally adjust labor forces compared to May, with only Alabama and Montana growing.

"Let's be clear. Across the nation, discouraged workers and nonexistent job creation is all about a federal policy environment that is completely hostile to entrepreneurship, business and investment. So long as the policy agenda focuses on more government spending, increased taxes, and expanded regulation, under-performing or nonexistent economic growth and job creation will persist."

Housing Market Ills Persist

News on the housing front was a clear negative in June, according to a report today from the National Association of Home Builders.

As MarketWatch.com reported:

U.S. home builders are turning increasingly pessimistic about their business after home sales dried up when a federal subsidy expired, according to the latest survey by the National Association of Home Builders.

The NAHB/Wells Fargo housing market index fell two points to 14 in July, down from a downwardly revised 16 in June. It's the lowest since April 2009, the NAHB said Monday.


At 14, the index shows that about one in seven builders has a favorable view of the housing market. And builders' views on prospective sales were the gloomiest since March 2009.

"The pause in sales following expiration of the home buyer tax credits is turning out to be longer than anticipated due to the sluggish pace of improvement in the rest of the economy," said David Crowe, chief economist for the builders' advocacy and lobbying group.

Crowe is absolutely on target. Entrepreneurship, investment and credit are constrained mainly due to the massive uncertainties and costs inflicted on the public policy front – from government spending and debt to taxes and regulations – now and scheduled to come in the short and long run. Job creation is nonexistent. Consumer and small business confidence continue to suffer. These negatives hurt the housing market, and in turn, the long and continuing depression in housing serves as a major negative feedback further weighing down the economy.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

GDP Growth Shrinking

First quarter real GDP growth keeps getting smaller.

The first estimates put growth at 3.2 percent. That’s not bad, especially coming after real growth of 5.6% in the fourth quarter of 2009. Maybe a solid recovery was under way.

But the second estimate put real growth at 3.0% in the first quarter. Still, not bad.

And now this morning, the third estimate put first quarter real growth at only 2.7%. Well, that’s below the average growth rate over the past six decades, and is particularly sluggish during the early stage of a recovery.

Should we expect a solid, robust recovery looking ahead? Hardly. The real threat is how much the economy is going to slow. Why? Quite simple, really: Government is doing everything it can in terms of running up taxes, regulation, and spending, and that will slow down the economy in both the short run and over the long haul.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Double Dip?

I've debated economist Irwin Kellner a few times over the years. He is a very nice man, with whom I usually disagree. He's basically a Keynesian economist, while I am a supply-side economist. We look at the economic world from different directions.

In his latest MarketWatch.com column, Kellner lays out his take on why a possible double-dip recession is back on the table. And I have to say that he makes a compelling case.

If you do not want to get depressed, then do not read the piece. But if curious about some of the risks a Keynesian sees, check it out here.

Raymond J. Keating

Chief Economist

Small Business & Entrepreneurship Council

Public Doubts Politicians on the Economy

As an economist, I often am bewildered and frustrated by many actions taken and views expressed relating to policymaking and the economy. Sometimes it’s the public in general that generate such feelings. But usually, it’s our elected officials and their appointees.

Therefore, I take great heart in the following findings from a new survey by Rasmussen Reports:

A new Rasmussen Reports national telephone survey finds that only 32% of adults are at least somewhat confident that those policymakers know what they’re doing when addressing the current economic problems on Wall Street. That includes nine percent (9%) who are very confident.

However, 64% lack that confidence, with 40% who are not very confident in the policymakers and 24% who are not at all confident.

Investors are even more dubious. Sixty-seven percent (67%) of investors are not confident that policymakers know what they’re doing with regards to Wall Street.

These majorities are absolutely correct. Many policymakers do not have a clue as to what they are doing when regulating the financial industry – or pretty much any other industry – nor do they grasp all of the consequences and costs of their actions.

There’s your happy thought heading into the weekend.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

SBE Council Chief Economist on November Jobs Data and the Economy

Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council (SBE Council), issued the following statement on the November jobs data:

“While continuing job losses are never good news, the dramatic slowdown in the decline in payrolls – a loss of 11,000 in November – offers some hope. And the increase in employment via the household survey – the first since April – provides additional hope, though that survey is highly volatile from month to month.

“At the same time, there is much to still cause worry. For example, private sector payrolls declined by 18,000 in November. And over the past two months, government payrolls advanced by 53,000. We need private sector economic growth and job creation, not a bigger government sector that crowds out private activity. In addition, it’s striking that the labor force continued to shrink in November, a decline of 98,000. Discouraged workers dropping out of the labor force have kept the official unemployment rate lower than it otherwise would be.

“Given the poor environment right now for entrepreneurs and small businesses to create jobs – especially given anti-growth federal policy initiatives, like looming tax increases, big government health care, and costly climate change legislation –an underperforming recovery in terms of growth and jobs remains the most likely scenario for the economy for some time into the future.”

Government vs. Small Business

On November 1, the Jacksonville (NC) Daily News ran an editorial titled “Small Businesses Bear Brunt of Government.” It is one of those rare occurrences where a newspaper editorial hits economic reality perfectly.

The editorial, in part, said:

Small businesses often work on the tiniest of profit margins. They must constantly invest back into the business to stay viable, leaving very little profit — especially during the early, startup years. Most strive to be the best of neighbors, giving back many times over to people and events in their local areas. They support their communities not just with taxes and fees, but also through charitable giving as well as providing jobs, purchasing materials and equipment and providing a reason for people to come to the community in the first place.

Governments control, tax and regulate small businesses at every level, from the city to the county to the state to the federal government. Just as with individual and families all across this country, small businesses are being squeezed, not simply by the economy’s failures, but also by governments hungry for more money and control. This not only is unfair, it is also dangerous — perhaps even lethal — when it comes to the preservation of a growing and thriving middle class.

Absolutely correct!

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

The Real Lessons for Policy Today from the Great Depression

The Great Depression has gotten a great deal of attention over the past year. Policymakers, including President Barack Obama and Federal Reserve Chairman Ben Bernanke, have spoken of not making the same policy mistakes as back then.

Unfortunately, too often, the wrong lessons have been learned. Bernanke, for example, seems to think that the Great Depression was all about the Fed’s monetary policy being too tight. The Obama administration, leaders in Congress, and many of their supporters apparently choose to ignore the ills caused by misguided trade and tax policies at the time.

Both are wrong. The Great Depression was overwhelmingly about bad trade, tax, spending and regulatory policies.

If you have not read it, check out Arthur Laffer’s piece from the September 22 Wall Street Journal. It’s invaluable in terms of a quick, solid primer on the roles that massive increases in tariffs, and in federal and states taxes played in sinking the economy into depression and keeping it there, along with the part that the Roosevelt administration, not necessarily the Fed, played in messing with the nation’s money. These remain critical lessons for today.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council