James Pethokoukis

Politics and policy from inside Washington

Yes, there are still some mustard seeds out there …

Jun 23, 2009 17:58 UTC

Mike Darda of MKM Partners spys some of them:

1) The ratio of leading to coincident indicators is up nearly 5% since bottoming in October, a magnitude not seen outside of economic recoveries going back to 1960.

2) Similarly, the most sensitive credit market indicators (interest-rate swap spreads, LIBOR spreads, etc.) have barely budged in recent weeks despite the sagging equity market. Indeed, the TED spread has now fallen below the historical median. At the same time, corporate bond yields continue to fall, a strong recovery signal.

3) As we’ve pointed out before, the corporate bond market was probably the most powerful leading indicator of recession, depression and recovery during the 1930s.

4) What about the plunging money multiplier and collapsing monetary velocity? The credit markets tend to lead changes in measured velocity, and now suggest the worst of that decline is behind us. In any case, money is a leading indicator while nominal GDP (which is the numerator of the velocity equation) is a coincident indicator.

Why Obama’s big economic gamble is failing

Jun 19, 2009 09:56 UTC

A string of new polls seems to show that America’s belief in the wonder-working power of Obamanomics has begun to fade. A Pew poll found President Obama’s economic approval rating has fallen to 52 percent from 60 percent in April. A Wall Street Journal poll found 53 percent disapprove of his handling of GM and Chrysler vs. 39 who approve. And the New York Times found that 60 percent don’t think Obama has a “clear plan” to deal with the monstrous budget deficit.

Okay, here’s the thing: Obama took a tremendous economic and political gamble last January. The new president had the option of putting forward a stimulus plan that would attempt to reverse or significantly dampen America’s terrible economic downturn ASAP. The quickest and most effective approach would have been a big cut in payroll taxes. For $800 billion, combined Social Security and Medicare taxes could have been slashed by 6 percentage points, or 40 percent. That would have put $1,500 in worker paychecks and, according to one credible study, increased employment by 4 million jobs in 2009.

Instead, Obama chose to listen to Rahm “Never let a crisis go to waste” Emanuel and put forward an $800 billion plan that advanced his healthcare, energy and education policy goals — but pretty much neglected the economy in 2009. Team Obama had to fully understand this. Indeed, a study from the Congressional Budget Office study — when led by current Obama budget chief Peter Orszag — concluded that an Obama-like economic stimulus package would be “totally impractical” because it would take so long to implement. (True enough, only seven percent of the American Recovery and Reinvestment Act has been doled out so far.)

Presidential gamble. In short, Obama wagered that the deluge of money coming from the Federal Reserve would do the heavy lifting as far as stabilizing the financial sector and keeping the already apparent recession from turning into a real disaster. Voters would, thus, continue to support his policies to assert more government control over healthcare, heavily regulate energy through a costly cap-and-trade program and further intervene into the financial industry.

The gamble appears to have failed miserably, both economically and politically. The terrible tale of the tape: a) the current downturn is arguably the worse since the Great Depression; b) household wealth has fallen by $14 trillion during the past two years, including the first quarter of 2009; c) while the economy may not shrink as much this quarter as it did in the previous three months (-5.7 percent) or the final quarter of 2008 (-6.3 percent), unemployment is soaring; d) Obama himself said the jobless rate will hit 10 percent this year; d) even worse, the Federal Reserve sees it approaching 11 percent next year. (Recall, that the original White House economic analysis of the Obama economic plan never saw unemployment exceeding 8 percent if Obamanomics was passed by Congress.)

Falling public support. So now many Americans are rightfully wondering just what they are getting for that $800 billion, as well as massive budget deficits as far as the eye can see. And it goes beyond the mercurial world of polling. Pricey plans to deal with perceived climate change and healthcare are also appear on the ropes or are being scaled back as voters view them as lower priorities than job creation and taming out-of-control spending.

Green shoots? Oh there are some to be sure. Just yesterday, the Conference Board said its index of leading economic indicators rose by its biggest monthly amount in five years And the stock market is up nearly 40 percent from its lows as depression fears ebb. Gluskin Sheff economist David Rosenberg, by contrast, declares that the “era of the green shoots is over.” He points out that 1) bellwether FedEx described the economy as “extremely difficult” when it reported disappointing earnings , 2) United Airlines said second quarter traffic fell as much at 10.5 percent, 3) commercial real estate loan concerns led S&P to cut ratings on 22 non-”too big too fail” regional banks; 4) incomes are being pinched by rising gas prices, and 5) surging interest rates are refreezing the housing market.

Too little, too late.
Then, of course, there is rising unemployment, which is either a lagging indicator of an economy slowly on the mend or a forward indicator of a possible double-dip recession. Either way, it takes a long time for economic perceptions to change after a nasty downturn. Just ask all those congressional Democrats who lost their jobs in 1994. Even though the economy had then been growing for 14 straight quarters since the 1990-91 recession and the unemployment rate was down to 5.8 percent from a high of 7.8 percent, 72 percent of Americans still thought the economy was “fair” or “poor” and 66 percent though the nation was headed in the wrong direction. What do you think the national mood will be like on Election Day 2010 if unemployment is over 10 percent, gas prices near $4.00 a gallon and homes prices moribund? Certainly by then, the effectiveness of the “Blame Bush” mantra will have hit its expiration date for Obama and the rest of the Democratic Party.


I understand the article and the economic and political debates (arguments) being made here by the analyticals on both sides. I would like to suggest to posters that they read articles on behavioral investing or behavioral purchasing. This may surprise the readers here but the vast majority of people do not follow politics. And they certainly are not educated in economics or even capable of spelling GDP much less understanding a chart forecasting GDP quarterly percentage growth.

So to the point, voters measure candidates on how they feel about the candidate. For example:

1) I feel Candidate X is for the little guy. I am a little guy. Candidate X is my choice.

2) I feel Candidate X is for unions. I am a union guy. Candidate X is my choice.

3) I feel Candidate X is for women. I am a woman. Candidate X is my choice.

4) I feel Candidate X is for gays. I am gay. Candidate X is my choice.

5) I feel Candidate X is for minorities. I am a minority. Candidate X is my choice.

(And I use the demographics on the Dem side only in order to shorten the post. For fun, create your own list for Repubs.)

If Candidate X has enough voter support to win, victors then go to Washington to create personal family wealth for themselves, their friends and possibly their community, in that priority order. Are the voters original feelings accurate, relevant or even considered by the candidate? Perhaps..

But lets get real about the role analytics of any sort whether healthcare, energy, engineering, but especially economics have to play in the voters decision process or the ensuing support.

The overwhelming majority of people I have dealt with never let facts or data get in the way of their opinions (feelings).

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Recessions and entrepreneurs

Jun 15, 2009 14:06 UTC

A great study on recessions and creative destruction from the Kauffman Foundation:

This research study, analyzing data from the U.S. Census, the Fortune 500, and the Inc. list of America’s fastest-growing companies, presents three main findings:

1. Recessions and bear markets, while they bring pain and often lead to short-term declines in business formation, do not appear to have a significantly negative impact on the formation and survival of new businesses.

2. Well-over half of the companies on the 2009 Fortune 500 list, and just under half of the 2008 Inc. list, began during a recession or bear market. We also find that the general pattern of founding years and decades can help tell a story about larger economic trends.

3. Job creation from startups is much less volatile and sensitive to downturns than job creation in the entire economy.

An improving job market? Maybe not

Jun 10, 2009 16:37 UTC

The below chart, highlighted by Jeffrey Frankel of RGE Monitor, provides a counterpoint to the idea that the labor market is improving and employers are gearing up to hire. If they were, wouldn’t they first push their folks to work more hours?


A somewhat more bullish outlook

Jun 9, 2009 19:27 UTC

From Macroeconomic Advisers:

GDP declined at a 5.7% annual rate in the first quarter following a 6.3% decline in the fourth quarter of last year. Together, these declines constitute the second sharpest two-quarter decline in GDP in the postwar period. But a bottom in GDP is forming, and we look for a modest 0.9% decline in the second quarter followed by moderate growth in the second half of this year and above-trend growth in 2010 and 2011. The sources of the rebound continue to be the aggressive monetary and fiscal policy responses under way; the success in Treasury’s efforts to recapitalize the major banks and to provide sufficient capital buffers, if necessary, so that banks are more likely to make loans; diminished drag from housing and credit conditions; and a rebound in equities that is already under way. In this forecast, the unemployment rate peaks at 9.6% at the end of this year and declines only slowly thereafter. Inflation falls significantly, and the FOMC is expected to maintain a near-zero federal funds rate for a very extended period.


The entire financial crisis has a common denominator. It’s easy to research James. People are not paying attention. One ” too big to fail” company has caused the crisis by doing something very very illegal. That same company is receiving all the bail out and TARP money.
It all relates to Social Security. Unfortunately, it was privatized long ago, prior to 1991 and lost. International accounts were paid to one company who was caught, created the whole crisis and it goes back to Enron.

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Roubini: 9 reasons why the recover will be a bust

Jun 9, 2009 10:23 UTC

Nouriel Roubini tries to grind his heel into the green shoots:

First, employment is still falling sharply in the US and other economies. Indeed, in advanced economies, the unemployment rate will be above 10% by 2010. This will be bad news for consumption and the size of bank losses.

Second, this is a crisis of solvency, not just liquidity, but true deleveraging has not really started, because private losses and debts of households, financial institutions, and even corporations are not being reduced, but rather socialized and put on government balance sheets. Lack of deleveraging will limit the ability of banks to lend, households to spend, and firms to invest.

Third, in countries running current-account deficits, consumers need to cut spending and save much more for many years. Shopped out, savings-less, and debt-burdened consumers have been hit by a wealth shock (falling home prices and stock markets), rising debt-service ratios, and falling incomes and employment.

Fourth, the financial system – despite the policy backstop – is severely damaged. Most of the shadow banking system has disappeared, and traditional commercial banks are saddled with trillions of dollars in expected losses on loans and securities while still being seriously undercapitalized. So the credit crunch will not ease quickly.

Fifth, weak profitability, owing to high debts and default risk, low economic – and thus revenue – growth, and persistent deflationary pressure on companies’ margins, will continue to constrain firms’ willingness to produce, hire workers, and invest.

Sixth, rising government debt ratios will eventually lead to increases in real interest rates that may crowd out private spending and even lead to sovereign refinancing risk.

Seventh, monetization of fiscal deficits is not inflationary in the short run, whereas slack product and labor markets imply massive deflationary forces. But if central banks don’t find a clear exit strategy from policies that double or triple the monetary base, eventually either goods-price inflation or another dangerous asset and credit bubble (or both) will ensue. Some recent rises in the prices of equities, commodities, and other risky assets is clearly liquidity-driven.

Eighth, some emerging-market economies with weaker economic fundamentals may not be able to avoid a severe financial crisis, despite massive IMF support.

Finally, the reduction of global imbalances implies that the current-account deficits of profligate economies (the US and other Anglo-Saxon countries) will narrow the current-account surpluses of over-saving countries (China and other emerging markets, Germany, and Japan). But if domestic demand does not grow fast enough in surplus countries, the resulting lack of global demand relative to supply – or, equivalently, the excess of global savings relative to investment spending – will lead to a weaker recovery in global growth, with most economies growing far more slowly than their potential.


Now c’mon.. you almost excerpted his whole post. What’s your opinion?

SF Fed: Near 11 percent unemployment and a jobless recovery

Jun 9, 2009 00:28 UTC

The San Francisco Fed paints a gloomy outlook for the U.S. labor market with unemployment hitting near 11 percent next year and above 9 percent through 2011(bold is mine):

We combine data on involuntary part-time workers with the standard unemployment rate to arrive at an alternative measure of labor underutilization. We plot this measure in Figure 3, which shows that the labor market has considerably more slack than the official unemployment rate indicates. The figure extends this labor underutilization measure using the Blue Chip consensus forecast for the unemployment rate as a benchmark and then adding a share of involuntary part-time workers based on the proportion of workers in that category to the unemployed during the current recession. This projection indicates that the level of labor market slack would be higher by the end of 2009 than experienced at any other time in the post-World War II period, implying a longer and slower recovery path for the unemployment rate. This suggests that, more than in previous recessions, when the economy rebounds, employers will tap into their existing workforces rather than hire new workers. This could substantially slow the recovery of the outflow rate and put upward pressure on future unemployment rates.


If economy improves, does GOP have a plan B?

Jun 8, 2009 18:09 UTC

Over at NRO, my pal Ramesh Ponnuru looks at all the green shoots and mustards seeds and wonders the following:

Are Republicans and conservatives overinvesting in pessimism about the recession? … If Republicans keep up this approach and the economy does begin to recover in a way that registers with voters by the 2010 elections, then Obama and the Democrats will … be able to say that their take on the economy was superior to that of the Republicans—and that claim will reinforce impressions that their stimulus was responsible for any improvement (whether or not it actually was). … I think Republicans would be better advised to say that there are some good signs, none of which seem connected to liberal policies, and that those policies threaten to increase inflation before too long. …  In 1993 too many Republicans resisted Clinton’s tax increases by claiming that they were not merely likely to reduce long-term growth below what it would otherwise have been but that they were incompatible with economic growth at all. When the economy recovered, they were discredited and the recovery was attributed to Clinton’s policies. Let’s not make the same mistake this time around.

Me:  My guess is that unemployment will still be pretty high a year from now and real estate hardly booming. As far as how the economy might affect the electorate, what I do know is that there is lag between economic performance and economic perceptions that is greater than many might assume. Let me point out one example, the 1994 midterm elections after the 1990-91 recession:

Even though the economy had then been growing for 14 straight quarters and the unemployment rate was down to 5.8 percent, 72 percent of Americans still thought the economy was “fair” or “poor” and 66 percent though the nation was headed in the wrong direction.  That’s right 3 1/2 years after the 1990-91 recession ended, the economy was still weighing negatively on voters and hurting the incumbent political party.

A salad of green shoots and mustard seeds

Jun 8, 2009 17:52 UTC
Brian Wesbury and Bob Stein of FIrst Trust Advisers offer some sunshine on the U.S. economy:
1) Since bottoming in February, consumer confidence has had the fastest three-month increase on record.
2) The ISM manufacturing index, which fell to historic lows over the winter, has climbed from its hole to signal that the overall economy is now expanding.
3) The Richmond Federal Reserve index, a measure of manufacturing in mid-Atlantic states, is showing growth.
4)  Container shipments both into and out of the ports of Los Angeles and Long Beach – key measures of international trade – have traced a V-shaped recovery.
5) In the financial markets, the yield on the 10-year Treasury note is back up to 3.86%, almost exactly where it was in August 2008, just before the crisis hit.
6) The VIX Index – a measure of stock market volatility and risk – has also traded back to levels not seen since August 2008.
7)  Meanwhile, key commodity prices, such as oil, copper, lumber, and gold are well off crisis-period lows.
Their bottom line:
In the last full calendar quarter before September (the second quarter of 2008), real GDP grew at almost a 3% annual rate. This is exactly what we expect for the third quarter of 2009 – 3% real GDP growth – with even faster economic growth in Q4 and then in 2010.

Should Obama get credit for ending the recession?

Jun 3, 2009 14:07 UTC

Mustard seeds (or green shoots, if your prefer) are appearing everywhere, from credit markets to manufacturing to housing. And of course the 40 percent surge in the U.S. stock market since mid-March is hard to miss.

So here’s a question: If the American economy shifts back into growth mode this year, does Barack Obama deserve the credit? Now if you click over to Recovery.gov, you’ll see that the U.S. government has paid out roughly $37 billion in funds from the $787 billion American Recovery and Reinvestment Act. That’s not too much dough for a $14 trillion economy. And while 110 million households will eventually receive some $55 billion from the Making Work Pay tax credit, that money has only been popping up in paychecks since April 1.

Now compare the Obama fiscal stimulus to the money stimulus of the Federal Reserve. As described by Brian Wesbury and Bob Stein at First Trust Advisers: “Money supply measures are surging – in the past six months, M1 is up 25.2% at an annual rate, currency outstanding is up 15.4%, checking account balances are up 74.2%, and M2 is up 15.9%. To top this off, the Fed has … $1 trillion plan to basically print money and buy assets including treasury bonds.” Also note the language of Richard Fisher, president of the Dall Fed, in speech yesterday: “We have succeeded in pulling the economy back from the brink. We’ve come back from the abyss.”

Of course, the bigger question is whether voters in the 2010 midterm elections will view Obamanomics as a success. Let me know what the November 2010 unemployment rate is, and I will give you an answer.


My indication would be how many U.S. Republican senators are going to be vulnerable to the Obama effect, you know all that “Time for Change” stuff, we’d have to look at all the Republican senators from 2006, what were the voting results and who did they run against. My Theory would be a number of these guys would lose their seats, Democratics could easily be up to 68-69 going into 2012. The Obama effect could still be there and alot of these Senators that didn’t have to worry about the tidal wave of Democratic support could still be lingering in 2010. Where is my generations Reagan???? whimper whimper…

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