With all the bad news lately I thought I would try to put in a positive spin every once in a while. Today I was reading an article by Brian Wesbury and Robert Stein from First Trust Portfolios. The National Bureau of Economic Research is the United States' semi official recession arbiter. According to the NBER our current recession began in December of 2007. Mr. Wesbury and Mr. Stein argue that since real GDP grew at 1% from then through August 2008 the recession couldn't have started then.
When Lehman Brothers collapsed and the first $700B bailout was proposed panic ensued. Consumer spending dropped off the face of the earth and the economy shrank at a rate of 5.5%. According to their logic we've only been in an official recession since September of last year.
So how do we know when the recession is coming to an end? One of the best early indicators is new claims for unemployment which usually peaks one or two months before the economy bottoms out. According to current data that peak appears to have happened in March at 658,000 compared to 635,000 in April.
Another good indicator is consumer spending which is one of the major causes of our current recession. Consumer spending grew 2.2% for the first quarter of this year and it appears that it will grow in Q2 as well. At the same time, both measures of consumer confidence shot up in April.
The housing market is starting to show very small signs of life. New home sales bottomed in January at a 331,000 annual rate. In February and March sales averaged 357,000. Excess inventories are starting to shrink and Wesbury and Stein believe a bottom has been reached in housing sales and starts.
According to their data we should see an end to this recession in the third quarter of this year. The recovery will be long and slow, due mainly to the amount of government spending that we are going to have to start paying for.
At this point I'll take any signs of positive growth. Hopefully things will start to turn in the right direction and the panic that has dictated much of the current recession will subside.
Friday, May 15, 2009
Wednesday, May 13, 2009
Sorry for the Absence
I had surgery a couple of weeks ago and have been trying to catch up with life ever since. Since I know you all missed me so much I decided I'd better get back to the blogging. This article is from the Wall Street Journal and points out some scary facts about Obama's proposed tax increases.
By MARTIN FELDSTEIN
The barrage of tax increases proposed in President Barack Obama's budget could, if enacted by Congress, kill any chance of an early and sustained recovery.
Historians and economists who've studied the 1930s conclude that the tax increases passed during that decade derailed the recovery and slowed the decline in unemployment. That was true of the 1935 tax on corporate earnings and of the 1937 introduction of the payroll tax. Japan did the same destructive thing by raising its value-added tax rate in 1997.
The current outlook for an economic recovery remains precarious. Although the stimulus package will give a temporary boost to growth in the current quarter, it will not be enough to offset the combined effect of lower consumer spending, the decline in residential construction, the weakness of exports, the limited availability of bank credit and the downward spiral of house prices. A sustained economic upturn is far from a sure thing. This is no time for tax increases that will reduce spending by households and businesses.
Even if the proposed tax increases are not scheduled to take effect until 2011, households will recognize the permanent reduction in their future incomes and will reduce current spending accordingly. Higher future tax rates on capital gains and dividends will depress share prices immediately and the resulting fall in wealth will cut consumer spending further. Lower share prices will also raise the cost of equity capital, depressing business investment in plant and equipment.
The Obama budget calls for tax increases of more than $1.1 trillion over the next decade. Official budget calculations disguise the resulting fiscal drag by treating Mr. Obama's proposal to cancel the 2011 income tax increases for taxpayers with incomes below $250,000 as if they are real tax cuts. The plan to modify the Alternative Minimum Tax to avoid increases for some taxpayers is also treated as a tax cut.
But those are false tax cuts in which no one's tax bill actually declines. In contrast, the proposed tax increases are very real. And despite the proposed tax increases, the government's new spending and transfer programs would cause the annual budget deficit in 2019 to exceed $1 trillion, or 5.7% of GDP.
Mr. Obama's biggest proposed tax increase is the cap-and-trade system of requiring businesses to buy carbon dioxide emission permits. The nonpartisan Congressional Budget Office (CBO) estimates that the proposed permit auctions would raise about $80 billion a year and that these extra taxes would be passed along in higher prices to consumers. Anyone who drives a car, uses public transportation, consumes electricity or buys any product that involves creating CO2 in its production would face higher prices.
CBO Director Douglas Elmendorf testified before the Senate Finance Committee on May 7 that the cap-and-trade price increases resulting from a 15% cut in CO2 emissions would cost the average household roughly $1,600 a year, ranging from $700 in the lowest-income quintile to $2,200 in the highest-income quintile. Since the amount of cap-and-trade tax rises with income, the cap-and-trade tax has the same kind of adverse work incentives as the income tax. And since the purpose of the cap-and-trade plan is to discourage the consumption of CO2-intensive products, energy or means of transportation by raising their cost to consumers, the consumer-price increases would be the same for a 15% reduction in C02 even if the government decides to give away some of the CO2 emissions permits.
But while the cap-and-trade tax rises with income, the relative burden is greatest for low-income households. According to the CBO, households in the lowest-income quintile spend more than 20% of their income on energy intensive items (primarily fuels and electricity), while those in the highest-income quintile spend less than 5% on those products.
The CBO warns that the estimate of an $80 billion-a-year tax increase could be significantly higher or lower, depending on how the program is designed. The Waxman-Markey bill currently before Congress calls for reducing greenhouse gasses 20% by 2020 and by an incredible 83% by 2050. As the government reduces the amount of CO2 that is allowed, the price of the CO2 permits would rise and the pass-through to consumer prices would also increase.
The next-largest tax increase -- with a projected rise in revenue of more than $300 billion between 2011 and 2019 -- comes from increasing the tax rates on the very small number of taxpayers with incomes over $250,000. Because this revenue estimate doesn't take into account the extent to which the higher marginal tax rates would cause those taxpayers to reduce their taxable incomes -- by changing the way they are compensated, increasing deductible expenditures, or simply earning less -- it overstates the resulting increase in revenue.
Since the projected revenue from this source is already designated to be used for Mr. Obama's health plan, some other tax increases will be needed. Moreover, Mr. Obama's budget characterizes the projected $634 billion outlay for health-care reform as just a down payment on the program. The budget notes that there would be "additional resources and new benefits to be determined with Congress." Those additional resources would no doubt be even higher taxes.
The third major tax increase is the plan to raise $220 billion over the next nine years by changing the taxation of foreign-source income. While some extra revenue could no doubt come from ending the tax avoidance gimmicks that use dummy corporations in the Caribbean, most of the projected revenue comes from disallowing corporations to pay lower tax rates on their earnings in countries like Germany, Britain and Ireland. The purpose of the tax change is not just to raise revenue but also to shift overseas production by American firms back to the U.S. by reducing the tax advantage of earning profits abroad.
The administration is likely to be disappointed about its ability to achieve both goals. Bringing production back to be taxed at the higher U.S. tax rate would raise the cost of capital and make the products less competitive in global markets. American corporations would therefore have an incentive to sell their overseas subsidiaries to foreign firms. That would leave future profits overseas, denying the Treasury Department any claim on the resulting tax revenue. And new foreign owners would be more likely to use overseas suppliers than to rely on inputs from the U.S. The net result would be less revenue to the Treasury and fewer jobs in America.
It's not too late for Mr. Obama to put these tax increases on hold. If he doesn't, Congress should protect the recovery and the longer-term health of the U.S. economy by voting down this enormous round of higher taxes.
Mr. Feldstein, chairman of the Council of Economic Advisers under President Reagan, is a professor at Harvard and a member of The Wall Street Journal's board of contributors.
By MARTIN FELDSTEIN
The barrage of tax increases proposed in President Barack Obama's budget could, if enacted by Congress, kill any chance of an early and sustained recovery.
Historians and economists who've studied the 1930s conclude that the tax increases passed during that decade derailed the recovery and slowed the decline in unemployment. That was true of the 1935 tax on corporate earnings and of the 1937 introduction of the payroll tax. Japan did the same destructive thing by raising its value-added tax rate in 1997.
The current outlook for an economic recovery remains precarious. Although the stimulus package will give a temporary boost to growth in the current quarter, it will not be enough to offset the combined effect of lower consumer spending, the decline in residential construction, the weakness of exports, the limited availability of bank credit and the downward spiral of house prices. A sustained economic upturn is far from a sure thing. This is no time for tax increases that will reduce spending by households and businesses.
Even if the proposed tax increases are not scheduled to take effect until 2011, households will recognize the permanent reduction in their future incomes and will reduce current spending accordingly. Higher future tax rates on capital gains and dividends will depress share prices immediately and the resulting fall in wealth will cut consumer spending further. Lower share prices will also raise the cost of equity capital, depressing business investment in plant and equipment.
The Obama budget calls for tax increases of more than $1.1 trillion over the next decade. Official budget calculations disguise the resulting fiscal drag by treating Mr. Obama's proposal to cancel the 2011 income tax increases for taxpayers with incomes below $250,000 as if they are real tax cuts. The plan to modify the Alternative Minimum Tax to avoid increases for some taxpayers is also treated as a tax cut.
But those are false tax cuts in which no one's tax bill actually declines. In contrast, the proposed tax increases are very real. And despite the proposed tax increases, the government's new spending and transfer programs would cause the annual budget deficit in 2019 to exceed $1 trillion, or 5.7% of GDP.
Mr. Obama's biggest proposed tax increase is the cap-and-trade system of requiring businesses to buy carbon dioxide emission permits. The nonpartisan Congressional Budget Office (CBO) estimates that the proposed permit auctions would raise about $80 billion a year and that these extra taxes would be passed along in higher prices to consumers. Anyone who drives a car, uses public transportation, consumes electricity or buys any product that involves creating CO2 in its production would face higher prices.
CBO Director Douglas Elmendorf testified before the Senate Finance Committee on May 7 that the cap-and-trade price increases resulting from a 15% cut in CO2 emissions would cost the average household roughly $1,600 a year, ranging from $700 in the lowest-income quintile to $2,200 in the highest-income quintile. Since the amount of cap-and-trade tax rises with income, the cap-and-trade tax has the same kind of adverse work incentives as the income tax. And since the purpose of the cap-and-trade plan is to discourage the consumption of CO2-intensive products, energy or means of transportation by raising their cost to consumers, the consumer-price increases would be the same for a 15% reduction in C02 even if the government decides to give away some of the CO2 emissions permits.
But while the cap-and-trade tax rises with income, the relative burden is greatest for low-income households. According to the CBO, households in the lowest-income quintile spend more than 20% of their income on energy intensive items (primarily fuels and electricity), while those in the highest-income quintile spend less than 5% on those products.
The CBO warns that the estimate of an $80 billion-a-year tax increase could be significantly higher or lower, depending on how the program is designed. The Waxman-Markey bill currently before Congress calls for reducing greenhouse gasses 20% by 2020 and by an incredible 83% by 2050. As the government reduces the amount of CO2 that is allowed, the price of the CO2 permits would rise and the pass-through to consumer prices would also increase.
The next-largest tax increase -- with a projected rise in revenue of more than $300 billion between 2011 and 2019 -- comes from increasing the tax rates on the very small number of taxpayers with incomes over $250,000. Because this revenue estimate doesn't take into account the extent to which the higher marginal tax rates would cause those taxpayers to reduce their taxable incomes -- by changing the way they are compensated, increasing deductible expenditures, or simply earning less -- it overstates the resulting increase in revenue.
Since the projected revenue from this source is already designated to be used for Mr. Obama's health plan, some other tax increases will be needed. Moreover, Mr. Obama's budget characterizes the projected $634 billion outlay for health-care reform as just a down payment on the program. The budget notes that there would be "additional resources and new benefits to be determined with Congress." Those additional resources would no doubt be even higher taxes.
The third major tax increase is the plan to raise $220 billion over the next nine years by changing the taxation of foreign-source income. While some extra revenue could no doubt come from ending the tax avoidance gimmicks that use dummy corporations in the Caribbean, most of the projected revenue comes from disallowing corporations to pay lower tax rates on their earnings in countries like Germany, Britain and Ireland. The purpose of the tax change is not just to raise revenue but also to shift overseas production by American firms back to the U.S. by reducing the tax advantage of earning profits abroad.
The administration is likely to be disappointed about its ability to achieve both goals. Bringing production back to be taxed at the higher U.S. tax rate would raise the cost of capital and make the products less competitive in global markets. American corporations would therefore have an incentive to sell their overseas subsidiaries to foreign firms. That would leave future profits overseas, denying the Treasury Department any claim on the resulting tax revenue. And new foreign owners would be more likely to use overseas suppliers than to rely on inputs from the U.S. The net result would be less revenue to the Treasury and fewer jobs in America.
It's not too late for Mr. Obama to put these tax increases on hold. If he doesn't, Congress should protect the recovery and the longer-term health of the U.S. economy by voting down this enormous round of higher taxes.
Mr. Feldstein, chairman of the Council of Economic Advisers under President Reagan, is a professor at Harvard and a member of The Wall Street Journal's board of contributors.
Wednesday, April 15, 2009
More Layoffs
UBS (which was formed by the merger of Union Bank of Switzerland and Swiss Bank Corporation) just announced that they will lay off 8,700 employees which is about 12% of their workforce. This is significant here because they have a large presence in the US as well as more locally in Utah.
Apparently these cuts are necessary because there are many customers pulling their deposits out of the bank due to its new policy to cooperate more closely with foreign nations to help prevent tax evasion. The management at UBS has determined in the wake of the falling deposits and large losses in subprime mortgages it is time to adapt its size to lower levels.
This kind of adaptation is necessary in times like this, however it is still a little disconcerting to see cuts this large still hitting. The road to economic recovery will rely largely on the creation of jobs. If employment keeps being cut like this it will be very difficult to start any kind of resurgence of economic activity.
Apparently these cuts are necessary because there are many customers pulling their deposits out of the bank due to its new policy to cooperate more closely with foreign nations to help prevent tax evasion. The management at UBS has determined in the wake of the falling deposits and large losses in subprime mortgages it is time to adapt its size to lower levels.
This kind of adaptation is necessary in times like this, however it is still a little disconcerting to see cuts this large still hitting. The road to economic recovery will rely largely on the creation of jobs. If employment keeps being cut like this it will be very difficult to start any kind of resurgence of economic activity.
Tuesday, April 7, 2009
What are they thinking?
A customer sent an order to a distributor for a large amount of goods totaling a great deal of money.
The distributor noticed that the previous bill hadn't been paid and was several months past due. The collections manager left a voice-mail for the customer saying, "We can't ship your new order until you pay for the last one."
The next day the collections manager received a collect phone call, "Please cancel the order. We can't wait that long."
This appears to be the business plan of the Congressional Budget Office. I was worried about having a Democratic President while the Democratic Party controls Congress as well. One of my biggest fears was that government spending would get out of control and it seems that fear is turning to reality.
So many people criticized the Bush Administration for running $150-400 billion annual budget deficits. While I do think things could have been run better those deficits could be managable with proper planning during better economic conditions. The new estimates coming from the CBO would double the national debt from $6.7 to $17 trillion by the year 2019.
Short term deficits are to be expected. The current Administration inherited an economic and financial mess of epic proportions. Without Obama's policies this year's deficit would have been around $1.2 trillion. However, the current deficit projections are double what the Bush Administration's stimilus plans would have spent for the next two years.
All of this overspending in the next couple of years is scary, but most economists have accepted it as the lesser evil for the current problems we are facing. What gets really terrifying is the continued deficit projections over the next 10 years. I pulled these graphs from the Thredgold report from April 1, 2009.
You can see that the outlook is very grim. If this is the way things really pan out, I have no idea how we will ever even make a dent in paying off our national debt. We as a nation must figure out a way to become fiscally solvent. We must stop passing the buck to future generations because someday the bill will come due. Let's get this under control before the dollar is worth nothing and we become the United States of China.
Friday, April 3, 2009
Unemployment
Right now the current "official" unemployment rate is 8.5% which is the worst since 1983. This in and of itself is really bad news. However, that number only figures those who are out of work and looking for a job. The number of those who are underemployed is also rising. Underemployed are those people working part time hours who want to be working full time. In this rough economy we also have many people who are out of work but have given up looking for a job. If you add these two groups to the totals you have 15.6% of the US population that wants better employment. It's going to be tough for our economy to recover with that many people struggling to make ends meet.
In my last post I mentioned that as consumer confidence rises, spending increases which will boost our economy. This can only happen if people actually have the money to spend. If 3 out of every 20 people are struggling with under or unemployment it will be tough to get any stimulus in the economy. I believe that if we see much economic growth this year it will be government manufactured through all the "stimulus" packages that we'll be paying for for generations....more on that later.
In my last post I mentioned that as consumer confidence rises, spending increases which will boost our economy. This can only happen if people actually have the money to spend. If 3 out of every 20 people are struggling with under or unemployment it will be tough to get any stimulus in the economy. I believe that if we see much economic growth this year it will be government manufactured through all the "stimulus" packages that we'll be paying for for generations....more on that later.
Wednesday, April 1, 2009
Off to a good start.
There was actually some good news that came out today. Consumer confidence rose slightly in March. This is a very important factor for our current economic conditions because much of the driving force of this recession is the actions of consumers that are being driven by fear. Once people start having more confidence in the economy, both in present conditions and in their expectations for the future, their spending will increase and economic conditions will improve as more money works its way into the market.
(You can click on the image to see a readable version of the graph)
We're not talking about a huge increase, but at this point any positive news is welcome.
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